Economy, Business And Markets

New Bond Makes Way to Gov't Debt Market

New Bond Makes Way to Gov't Debt MarketNew Bond Makes Way to Gov't Debt Market

The government sold the first batch of the so-called Ijarah sukuk, a form of Islamic bond, on the Iran Fara Bourse over-the-counter market earlier this week, adding to the financial instruments that would help it repay its overdue debt to government contractors.

Demand for the bonds was high. According to Amir Hamouni, chief executive of IFB, "Five trillion rials (about $144 million at market exchange rate) worth of Ijarah sukuk, were sold in less than a second on IFB's system, due to high demand."

Delays in the payment of government debt has grounded the Iranian economy to a halt. Many contractors abandoned state projects due to funding shortages, while some have gone bankrupt.

The actual amount of debt is unknown, even to the minister of economy who recently organized a task force to verify sums owed by the government and its companies to creditors and contractors.

With its oil income squeezed by tumbling crude prices and the after-effects of sanctions, the administration lacks the cash to repay contractors and get its projects going again.

The stalemate has had far-reaching effects in the economy. Unemployment has shot up, household incomes have fallen and banks had to offer interest rates in the high twenties to cover the costs incurred from having their funds locked up in state projects.

The administration is trying to reverse the cycle and repay overdue debt.  To do so, it turned towards bond markets last year. It issued its first-ever Islamic Treasury Bills without coupon payments and offered them at a discount to their face value.

The bonds were "well-received", as officials said. However, for a creditor, any bond is better than nothing.

Now, the government is using other sukuk forms and trying to gain credibility by redeeming its outstanding debt on time. The recently sold Ijarah sukuk are part of this new move.

Although many ministries have issued Musharakah sukuk to fund projects over the past two decades, this is the first coordinated government move to use bonds for debt repayment.

Novin Investment Bank acted as broker and consultant on the sale of the Ijarah bonds.

The bonds, each sold for 880,000 rials ($25.34), have a four-year maturity date and bear 18% interest per year, paid every six months. The Management and Planning Organization, in charge of drafting the budget, has guaranteed the bonds.

"Part of the government's debts to carrier Mahan Air and Ayandehsaz Pension Fund will be repaid," said the bank's chief executive, Vali Nadi Qomi.

The bonds do not have a market maker to help out with their liquidity, so trading them will be hard.

"The government did not set aside enough money for the market making fees on Ijarah bonds in its budget. So their first batch will not have a market maker. However, the issue has been addressed in this year's budget," said Nadi-Qomi.