March 20, 2016
“We are in negotiations with some of these rating agencies,” the president’s chief of staff, Mohammad Nahavandian, told Reuters in an interview in London.
He did not identify the agencies Iran was talking to. There are three internationally recognized credit rating agencies—Fitch Ratings Inc., Moody’s Investors Service and Standard & Poor’s Ratings Services. Moody’s, which is British-based, rated Iran about a decade ago, but neither of others, which are American-based, have rated Iran since the 1979 revolution.
Iran is being billed by many commentators as the largest market to open to the world since the 1991 fall of the Soviet Union.
An international rating will involve scrutiny of finances and revenue forecasts, providing prospective investors with insight into Iran’s economic environment.
A rating from at least one of the three agencies is a virtual necessity before Iran can carry out its announced plans to float bond sales in Europe in order to raise much needed capital.
Jay Leitner, the managing director and head of the Middle East Branch of Fitch, said his firm is negotiating to commence work in Iran and predicted the first rating would be available by next year.
Leitner said that before Iran issued its one Eurobond early in the century Fitch rated four entities in Iran—the state, the national oil company and two banks. “We withdrew these ratings in 2008 when the sovereign bond matured. So, we have not rated anything there for the last eight years.”
He said, “We are currently negotiating potential fees, how we rate certain companies, what are our views on certain sectors. We are still going through a few final internal signoffs before we can engage formally with contracts.”
These credit ratings largely determine the rate of interest that a country must pay to sell its bonds. Both the Pahlavi Dynasty and the revolutionary regime have generally followed conservative financial policies, which should help Iran earn a quality credit rating. Low oil prices and the regime’s tendency against transparency are the main factors working against that.
Last December, the Islamic Republic announced plans to issue “at least” $500 million in bonds denominated in foreign currencies after the lifting of sanctions.
In the 36 years since the Islamic revolution, the country has dipped into international debt markets exactly twice, both times in 2002. Those bonds, worth a total of 1 billion euros, matured in 2008 and have long since disappeared from markets.
Deputy Economy Minister Mohammad Khazaee said the 2016 sale was intended as a test of foreign interest in investing in Iranian debt after the end of the nuclear hassle. “We have to test the market outside Iran,” he said.
Another reason, of course, is low oil prices. The plunging oil market has spurred other oil producers like Qatar and Saudi Arabia to issue bonds lately.
One problem for Iran is suspicions as to whether it will adhere to the nuclear agreement. If it doesn’t, sanctions could be “snapped back” and investors would be squeezed.
On the other hand, many economists think Iran has lots of room for growth after being squeezed for so long by sanctions. Furthermore, it has so little debt that it has lots of spare capacity for bond issues. Iran’s total government debt was just 11.4 percent of gross domestic product in 2014, according to the CIA’s World Factbook. That’s lower than 91 percent of the countries tracked by the CIA. It compares with 100.5 percent for the United States.
And Iran has never defaulted on a bond issue.
Khazaee didn’t say in what currency the bonds would be denominated. He gave the total in US dollars, but the bonds are more likely to be issued in euros since no US residents—non-citizens as well as US citizens—are allowed to buy Iranian bonds.
Iran announced last September that it planned to sell bonds worth $1.7 billion denominated partly in rials and partly in euros to be sold in domestic and foreign banks. The resulting funds are to be used to boost oil production capacity by about 300,000 barrels per day and daily gas production capacity by 48.6 million cubic meters.
But the big question is how the bonds will sell. In December 2012, the Central Bank acknowledged that its last sale of rial bonds had flopped.
The Tehran Times quoted Ali-Asghar Mir-Mohammad Sadeqi, then deputy governor of the Central Bank, as saying that in the Persian year that ended in March 2012, the Central Bank issued $7.5 billion worth of rial bonds but actually sold only $3.8 billion or 51 percent.
The US increased interest rates in December for the first time in years, and that will likely erode demand for developing-nation debt in general. Iran will probably want to raise money as soon as possible to lock in borrowing costs below 10 percent, said Amir Zada, a managing director at Exotix Ltd., which specializes in illiquid and distressed emerging-market debt.