Investors sign up for Eurobond, defy US threats

12 July 2002

Against a backdrop of difficult market conditions, scepticism about pricing and political pressure from the US, the first Eurobond issue in the name of the Islamic republic on 10 July managed to attract a large number of European investors. The landmark transaction was carried out by joint lead managers BNP Paribasand Commerzbank(MEED 5:7:02).

At 425 basis points (bp) over the equivalent rate of European swap transactions, the Eur 500 million ($497 million) bond was priced above the 350-400 bp initially targeted by Iran's Bank Markazi (central bank), but below the range suggested by some European bankers. The heavily oversubscribed paper has a maturity of five years and carries a coupon of 8.75 per cent.

Sources close to the deal say that the subscriber base was almost evenly split between regional and European investors. However, with 53 per cent of the paper placed in the Middle East, 42 per cent in Europe and 5 per cent in Asia, Iran failed to attract the targeted 50-66 per cent of European subscribers.

'If this split is indeed the case, that is not what Iran was looking for,' says a London-based banker. 'But a more concerted European involvement would have required a better pricing.'

Within Europe, UK institutions absorbed the largest share of the paper at 15 per cent, followed by German investors at 11 per cent and Swiss investors at 8 per cent. The remainder was taken up by investors in France and the Benelux states.

A source close to the deal says that a wide range of institutions, including banks, investment funds, insurance companies and asset managers, invested in the bond. Among European investors that signed up for the paper were fund managers Deutsche Asset Managementand Union Investment.

Bankers say Iran had aimed to attract the largest possible European investor base in order to establish a benchmark for future sovereign bond and corporate bond issues.

Major European banks not buying into the bond said that their absence from the deal was not related to US threats against Iran, but mostly due to pricing considerations.

'One would have expected a different pricing,' says Dominique Audin from Pictet Asset Management. 'The political risk involved is certainly difficult to price, but we would have expected them to be more on the generous side. Given the choice between paper from the Ukraine, which is rated B, trading at 600 bp, and the Iranian bond, at about 400 bp, I would choose the Ukraine.'

The 11 co-arranging banks on the deal were Arab Bank, Arab Banking Corporation, Emirates Bank International, Gulf International Bank, National Bank of Dubai, Qatar National Bank, The Arab Investment Company, Credit Agricole Indosuez, Hypovereinsbank, Standard Chartered Bankand Standard Bank.

The bond launch was followed by London-based rating agency Fitchassigning a B+ rating with a stable outlook to the paper. Fitch says that Iran's main assets are the positive external debt figure and the country's position as a large net external creditor. Fitch also alludes to positive steps in the economic reform process.

However, the rating agency maintains that 'the sovereign ratings are constrained primarily by the interaction of complex international and domestic political developments. Although US views on Iran are not necessarily shared by other members of the international community, Fitch believes they are a significant element of Iran's international risk profile.'

Fitch in May assigned a B+ sub-investment-grade, long-term foreign currency rating to Iran (MEED 17:5:02).

In an unprecedented move, the only other agency to rate the country, US-based Moody's Investors Service, withdrew its sub-investment-grade B2 rating in May due to US government pressure (MEED 7:6:02).

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