My redneck buddy in south ga said his banker was buying IRAQI dollars and he bought some too.
=DJ Iraq Return To International Bond Markets Greeted Warily
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By Matthew Cowley
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Iraq completed its latest commercial debt swap Monday, bringing a new $2.7 billion bond to market in exchange for about $13.6 billion of Saddam Hussein-era debt.
Investors gave the new bond a cautious welcome, lured by the high yield but uncertain about the overall risk of investing in the war-torn country.
The bond is yielding an eye-catching 9.4% per year in the secondary market, a high return following the significant tightening over the last two years in emerging market bond risk premiums to record lows of late.
"Investors keep a close eye on anything with substantial yield," said Chris Yanney, who heads up $2.5 billion of emerging market debt and equity investments for Delaware Investments.
The new bonds, which carry a coupon of 5.8% and are due in 2028, were trading Monday in the secondary market at around 70% of face value, as they had been in the "when issued" market in recent weeks. Most mutual funds are prevented from participating in that preemptive market, and a clearer picture of their interest is likely to emerge in coming weeks.
The creditors participating in this debt swap, which involved an 80% write-off on the paper's original value, are a mixed bunch spread across 70 countries.
They include commercial banks such as Italy's Banca Nazionale del Lavoro SpA (BNL.MI), which Monday said it would receive $683 million of the new bonds. Others are specialist "vulture" funds, hedge funds, and high net-worth individuals, as well as construction, engineering and other firms that were never paid for their services. Japanese trading companies Sumitomo Corp. (8053.TO), Mitsui & Co. (8031.TO), Marubeni Corp. (8002.TO) and Tomen Corp. (8003.TO) all had said they would participate in the swap.
A number of these may not be natural holders of emerging market bonds, and will be looking to sell, which could present a buying opportunity for more traditional emerging market investors. On the other hand, this is an open secret, according to Delaware Investments' Yanney, and that removes some of the bond's upside potential.
Iraq's yield puts the country on a level comparable with Ecuador, which is rated B- by both Standard & Poor's and Fitch, and is considered one of the riskier emerging market credits. However, for Yanney, the comparison could be misleading.
"It is hard to compare Iraq with anything else, as it is the only country in emerging markets with an occupying force and major government change," said Chris Yanney.
Sanjay Joshi, who heads a $450 million global fixed income team at London & Capital Asset Management, said Iraq's debt "looks interesting," but its politics and economics do not demonstrate a clear trend improvement that he needs to convince his clients.
Furthermore, Iraq's name is not yet recognized as a typical investment opportunity with which investors would be comfortable, he said.
"We like to have ticks all the way along (the usual credit criteria) before we get involved," said Joshi. "It is not clear that this name qualifies in all of those areas," he said.
Furthermore, the likelihood of volatility makes the new bond a natural target for the more speculative-minded hedge funds, which also puts off Joshi. "We don't want to be flipped around by the market," he said.
Ultimately, the two main drivers for Iraq's bonds will be the emergence of a government capable of administrating the country, and, crucially, rising oil production.
Final results of the general elections held on Dec. 25 were published last week, and, with no party winning outright victory, the resulting government is expected to be a broad coalition led by the United Iraqi Alliance.
"In our view, almost all parties appear to recognize the need to form a coalition government that is based on consensus and cooperation rather than sectarian quotas," said Merrill Lynch in a recent research note. "We believe that the formation of a broad-based government will be a key milestone in rebuilding Iraq. We remain constructive on Iraq's upcoming bond issue," it said.
Oil production and exports have also been on the wane, due primarily to persistent sabotage of oil pipelines and facilities. In early January, average exports fell to 1.1 million barrels per day, down from the usual 1.4 million-1.5 million b/d. Even that is far lower than the pre-war levels of 2.2 million b/d.
"Iraq has the third-largest proven reserves of (traditional) oil on earth," Yanney said. "Getting that oil production up as fast as possible will really drive these bonds tighter or wider," Yanney said.
The ups-and-downs of the news flow out of Iraq could also come to bear heavily on the bonds. But the the size of the issue should keep it liquid, while the fact that many dealers will be closely following developments could reduce the likelihood of nasty surprises, Yanney said.
The bonds are likely to be helped by fresh negotiations with other creditors, mainly governments, which are expected over time to convert their debts into the new bonds.
Some claims weren't reconciled in time for the settlement, meaning Iraq will probably have to issue another $300 million to $400 million, pushing the total size to about $3 billion, according to Richard Segal, of London-based Argonaftis Capital Management.
Moreover, Iraq has yet to carry out negotiations with a number of governments that lent to the previous Iraqi regime, the most significant of which is China, Segal said.
"The size of the bond could grow over time, making it much larger and more liquid," he said. "Investors will have to carry out their risk/return analysis. They may or may not think it's a good deal."
The Paris Club of creditors has already agreed to reduce Iraq's debts to less than $7.5 billion from the pre-war $37.5 billion. In 2004, the US canceled Iraq's entire $4.1-billion tab, while Canada has also written off a significant chunk of Iraqi debt. Talks with a number of other countries are ongoing.
According to recent comments by JPMorgan and Citigroup, Iraq's financial advisers, Iraq's total debt should fall to about $52 billion by the end of 2006, down from a pre-war estimate of between $85 billion and $90 billion. Definitive figures for Iraq's total debt are hard to come by, with others suggesting the overall pre-war size was closer to $120 billion-$130 billion.
-By Matthew Cowley, Dow Jones Newswires; 201 938 5692; matthew.cowley@dowjones.com
(Thomas Marshall in London contributed to this report)
(END) Dow Jones Newswires
January 23, 2006 16:44 ET (21:44 GMT) |
