Kurdistan bond debut not for the faint-hearted

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The semi-autonomous Iraqi state is set to be the latest sovereign issuer despite its geopolitical quagmire – posing an allocation dilemma for yield-hungry institutional investors.

Kurdistan fighters-R-600
Kurdistan Workers Party fighters near a position hit by ISIS car bombs


On Monday, an announcement appeared on the Kurdistan Regional Government’s (KRG) website, confirming that Deutsche Bank and Goldman Sachs have been appointed to help the semi-autonomous Iraqi state meet with international bond investors, "with a view to a potential transaction in the near future".

The news follows a non-deal roadshow last October, indicating investor interest for exposure to the oil-rich credit, whose oil exports have continued in earnest despite the advance of ISIS.

Confirmation of the mandate echoes Euromoney’s article in April suggesting the banks were working with Kurdistan, which needs the money in several areas: infrastructure development, to counter weak oil prices, and to finance a war against ISIS.

Tough sell

It’s the last part that is going to make this a tough sell. Do institutional investors want to be financing wars, no matter how much they might appear to be backing the more just side? Just how comfortable can one be with the repayment profile if it depends, somewhat heavily, on not losing that war?

No doubt any prospectus will link the funds directly to a specific infrastructure play – likely the Ceyhan pipeline or something similar – but a certain institutional queasiness is to be expected.

It’s not clear if the deal will be index-linked or a private placement. Investors presumably would prefer a deal structured by revenues from oil production to allay fears over the refinancing capacity of the besieged administration, which oversees a region with an estimated 45 billion barrels of onshore oil reserves – equivalent to North Sea oil production since the 1970s.

However, it’s not conflict that’s delayed it getting this far, but legislation. The KRG made its announcement after the passage of the 'law to raise funds through borrowing by the Kurdistan region – Iraq’.

That law allows Kurdistan to raise funds in its own name, part of a trend that might eventually, in more peaceful times, see it secede and become an independent nation.

While Iraq $2.7 billion 2028 notes yield over 8%, it’s not clear whether Kurdistan paper would trade within its neighbour’s curve – or whether any credit analysis is worth its salt since the debt sale is effectively a brave punt on the political cycle, given Iraq break-up risks, the advance of ISIS and the KRG’s secessionist bid.

In any case, a successful debt sale would be a boon for boosting financial interest in the growing region with pent-up oil-driven corporate demand for bonds, loans and equity.