Iran has taken the first steps in a journey that should eventually bring it back into the international debt markets – but there are tricky hurdles to overcome before it gets there.
A landmark in the domestic debt capital markets took place on September 30 when arguably Iran’s first ever true bond issue in rial, an Islamic government treasury bill, was launched, the website Emerging Markets reported in an analysis.
A form of a debt market has long existed in Iran, but not like local currency markets elsewhere. The structure is known as participation paper, carries a fixed coupon and is not tradable. Buyers can return the paper to the bank at any time during its typically three-year duration and get their money back.
Participation papers are underwritten and guaranteed by Iranian banks, which often issue them for specific individual projects or ministries.
“The debt market as you have it in Europe or the US — that did not exist in Iran until September 30 when the first Islamic treasury bills came to the market,” said Amir Mehran, advisor to the president at Bank Pasargad, one of Tehran’s strongest banks.
“We believe this market is going to develop in time, and that we are going to see more sovereign and corporate bonds coming to the market,” said Mehran. “Eventually we believe there will be a secondary market for the bonds, with the daily value going up and down depending on economic circumstances.”
No international issue can follow until sanctions are lifted on Implementation Day — the moment secondary sanctions on Iran formally end, probably in early 2016 — but then, there may be appetite to return to the international capital markets.
The move towards openness was magnified by news of a meeting between British Chancellor of the Exchequer George Osborne and his Iranian counterpart Ali Tayyebnia on the sidelines of the IMF meetings in Lima.
UK-Engineered Bans
“We want to open up new links with Iran assuming it keeps to its international obligations. Iran has been in the international deep freeze for many years. There was a very tough sanctions regime that Britain has led the world in implementing,” Osborne was later quoted as saying.
“I think we do need to start that conversation about the economic ties between our two countries,” he said, adding that he hoped to visit Tehran next year. “We will make that visit with our eyes wide open but we are starting from a point where there is almost no economic contact between these two countries.”
Both the central bank and the National Iranian Oil Company are believed to be planning bond issues, which would have to be in euros and handled by European banks.
“The introduction of conventional debt market products for the Iranian state and corporate could have a big impact on the Iranian economy and the financial sector in particular,” said Ramin Rabii, founder of Turquoise Partners, a financial services group in Tehran.
“Backed up by oil and gas reserves, the issuing of sovereign guaranteed bonds will enable the government to pay its debts and improve the balance sheet of the banking sector without relying on frozen assets abroad.” Turquoise estimates that today, traditional banking facilities account for 80% of funding in Iran, with capital markets undeveloped.
However, there are challenges ahead. There are questions as to whether even once the sanctions fall away, it will be permissible for a public oil entity in Iran to access the international markets.
