Economy, Business And Markets

Foreign Investors Sizing Up Iran’s Upcoming Debt Issue

Foreign Investors Sizing Up Iran’s Upcoming Debt IssueForeign Investors Sizing Up Iran’s Upcoming Debt Issue

Iran hopes to raise hundreds of billions of dollars needed to repair its sanctions-hit economy, but first it must win over global investors.

The Iranian government will likely offer at least $500 million in foreign-currency-denominated bonds to international investors in 2016, deputy economy and finance minister, Mohammad Khazaei, told The Wall Street Journal in a recent interview.

“The sale would be intended as a litmus test of interest in Iranian debt,” he said.

This is a crucial step if the country is to attract the investment it needs in infrastructure and energy to boost economic growth.

“I think in 2016 we have to pull the trigger,” Khazaei said. “We have to test the market outside Iran.”

Iranian officials also are planning to set up currency-hedging instruments via a futures market for foreign investors who do not want fluctuations in the value of the Iranian rial to hurt their returns, according to Mohammad Fetanat, the president of the Securities and Exchange Organization of Iran.

The possibility of an offering is a sign of how much the environment has changed since a nuclear deal in July. But the effort faces a number of hurdles.

This year’s drop in crude prices has worsened Iran’s national accounts and drained money from the pockets of the Middle Eastern investors most likely to buy its debt. The decline also has spurred bond issues from regional issuers like Qatar and Saudi Arabia, both of which have a longer track record of debt sales and higher marks from ratings agencies.

“People will look at the debt situation, but they’re going to have to get comfortable with some of these risks, which may not be prevalent in other countries,” said Abdul Kadir Hussain, chief executive of Mashreq Capital in Dubai.

Led by President Hassan Rouhani, Iran has managed to tamp down inflation and stabilize the value of its currency in the past two years. Money managers and economists think the country has a lot of economic potential.

“Its population of 80 million and gross domestic product of $400 billion make it one of the few large markets remaining untapped by global investors,” said Charles Robertson, chief economist at London’s Renaissance Capital.

With foreign debt currently around 1% of GDP, Iran has plenty of spare capacity to borrow.

Richard House, the head of emerging-markets fixed income at the UK’s Standard Life Investments, said there could generally be a significant amount of interest in Iranian debt because the country has not issued bonds in a long time, though the timing now is not great. The debt of several first-time African issuers has performed poorly in 2015 and oil prices are in sharp retreat.

“Given where oil is trading, it won’t be as easy for them to issue debt this time around, but there should definitely be interest again,” he said.

Iran sold €1 billion worth of euro-denominated bonds in 2002—its first and last foreign bond issuance since the 1979 Islamic Revolution. The nation paid off the five-year debt in full and on time.

Middle Eastern investors bought about two-thirds of that issue, with the rest absorbed by buyers in Europe.

Robertson estimated the debt issued this time would be rated below investment grade on par with bonds from Kenya or Nigeria, which Fitch Ratings has at B-plus and double B-minus, respectively. It would likely come with a yield of around 8%, he said—a high figure for a sovereign of Iran’s economic stature.

Iran’s last bond came with an interest rate of 7.75%.

The rial has weakened—a dollar bought around 10,000 rials in 2011, but now buys roughly 30,000—and become extremely volatile during the sanctions era, posing problems for both foreign investors and Iranian trade partners.

“Our banks with their correspondent counterparts outside the country need a little time to get in touch again and our banking system to get back on track as it was before,” Fetanat said.

“It takes a little time, but we are doing everything within our power to make it faster and to facilitate the process.”