Fixed-Income Index Presented

The Iranian debt market is struggling to grow while grappling with the traditional dominance of large banks in terms of financing.

It also suffers from a lack of transparency and coherence expected from a mature market, but with greater risks come greater potential returns and addressing the market’s shortcomings can create a lucrative investment opportunity.

Devising a comprehensive index for the market would be an effective step, one that could provide investors with a clear understanding of sporadic data available on fixed-income securities in Iran.

With that in mind, Kian Capital Management recently unveiled its fixed-income index to address the issue.

“Markets around the world offer numerous fixed-income indices for investors, but there is none in Iran as yet. Its existential necessity, while always obvious, has barely ever been addressed,” Payam Afzali, managing partner and head of investment banking at Kian, told Financial Tribune in a telephone interview.

The government has dallied with the idea of introducing a debt market index ever since the lifting of nuclear sanctions on Iran in early 2016.

Describing the Iranian debt market as “opaque”, Afzali noted that little has been done by market regulators in streamlining data for investors, which has led Kian to publish weekly reports on the Iranian debt market for over a year and a half to date.

 Debt Market Potential

Iran is increasingly relying on the capital market for financing. The Central Bank of Iran’s data indicate that capital market financing rose from $5.3 billion in 2013 to $12.3 billion last year.

However, Kian’s analyses show that the debt market accounted for only 37% of the figure in 2016, a share heavily dwarfed by loans given in the money market.

“Less than 5% of financing in Iran are handled by the debt market, with banks accounting for the rest,” said Afzali.

Similarly, the debt market made up only 1.5% of Iran’s 6.69 quadrillion rials ($163.19 billion) GDP and 5.5% of the capital market’s total 4.67 quadrillion rials ($114 billion) in 2016. The figures stood at 0.2% and 0.9% in 2013 respectively.

This is while the size of the international bond market exceeds $100 trillion and double the size of most developed countries’ GDP and capital market value.

Afzali believes that the debt market has the potential to grow, as it expands and new instruments are introduced, which can potentially lighten the burden of Iran’s financially-embattled banks.

Government-issued debt accounts for over 57% of the Iranian bond market. State-owned firms come next with 15%, followed by municipalities with 14% and the private sector with 13%.

And in terms of credit ratings, one would expect municipalities to be only a few steps less financially secure than the government–the most trusted issuer of debt–due to their constant flow of liquidity.

In Iran, however, rates on municipalities’ bonds stand higher than the government and corporations due to their less than ideal financial state.

 Index Methodology

The market is first divided into three categories: one to three-year government, corporate and municipal bonds. Each will have an index of its own, contributing to the general fixed-income index.

Then the bonds each index is based on are chosen, which have a number of prerequisites. First, they must have been traded for at least 20 days out of the last 30 trading days; second, they must have more than three months before they mature; and third, they must have an average daily trade value of over 2 billion rials ($48,780) for the last 30 trading days.

A select committee at the firm will also reevaluate the index’s methodology and each bond’s impact on it every three months.

 What the Index Shows

The index, launched on Saturday, tracks the debt market’s movements since January 2017 to date.

According to Kian’s data shared with Financial Tribune, the general fixed-income index currently stands at 104.7–having kickstarted at 100–with an average yield to maturity of 17.16%.

The indices for municipal, corporate and Islamic Treasury Bills also stand at 102.3, 105.8 and 104.6 respectively, with YTMs standing at 19.41%, 17.55% and 16.84%.

YTMs for all bonds have declined sharply since January, as they started the year with yields around 21-23%.

The general and treasury bill indices indicate relatively similar trends, which can be explained considering ITBs’ dominant weight in the market. After a sharp drop to the 95 territory in January-March, both indices followed a phlegmatic trend up until September when they jumped.

Corporate bonds index followed the same pattern with less fluctuations, while the municipal index barely moved much since January.