Iraq defies all logic by raising $1bn in debt
If Argentina can raise money for 100 years and Greece can print bonds despite being in a bailout, then why not Iraq?
The war-torn country defied conventional logic by issuing a US$1 billion five-year security on Wednesday without the backing of the US. The state’s declaration of victory over ISIL in Mosul, the country’s second-largest city, has clearly provided the impetus to brave issuing debt on its own.
Investor demand was huge – the deal was seven times oversubscribed. This enabled the lead managers to lower the indicated yield by 25-basis points to a final 6.75 per cent.
This is lower than what is available from a similar Ukraine bond, although it is well above the recent five-year issue from Greece, which trades at 4.6 per cent. The credit ratings are similar.
So what is the appeal? Iraq does have the benefit of being able to export oil again. Holders of the 2028 bond comprise all the major emerging market investors, and it is likely they have queued up to take part in this new deal.
An issue of this size will enter the emerging market bond indexes, and with an order book so strong it is likely to perform well. It becomes a self-fulfilling must-buy if investors are not to underperform their peers.
But that should not be an investment principle.
The yield on Iraq’s existing 10-year bond has dropped steadily, creating perfect conditions to issue new debt.
This is another example of the insatiable demand for yield that so worries central banks and market commentators. This would seem to define the very idea of a credit bubble: a wholly insufficient reward for what must be seen as a considerable risk, as Iraq is still in the midst of a serious civil conflict in the most unstable region in the world.
Return of capital seems to have taken a back seat to a decent coupon.