Iran mulls $1bn international bond issue

RAISING CAPITAL: The fall in oil prices has left Iran vulnerable financially. (Getty Images)

Iran is considering a return to international debt markets with bonds worth $1 billion, a central bank official said in comments published on Wednesday, in what would be a rare move by OPEC's No.2 oil producer.

Analysts said international credit conditions may make it difficult for the Islamic Republic to raise funds and warned that tightening UN and US sanctions on Tehran over its disputed nuclear plans could also deter investors.

Like other crude exporters, Iran, is facing declining revenue after global oil prices tumbled more than 60 percent in recent months, following years of windfall gains that have boosted reserves.

Deputy Central Bank Governor Hossein Qazavi was quoted by business daily Poul as saying a bond issue would help lure foreign investors, without elaborating on why Iran would want to tap capital markets stretched by the global financial crisis.

Many Western banks have cut ties with Tehran and some of the decisionmakers at banks were sceptical.

"We haven't heard anything about an Iranian issue and I would be doubtful that many people can buy Iranian debt. Iran does not have straightforward access to the international markets. Besides, there would be serious credit concerns," said a debt syndicate manager at a European bank based in London.

If Iran, despite such obstacles, goes ahead with the plan, it would be the first time it has offered bonds to investors abroad since its last Eurobond, issued in 2002, matured in April.

"It could be that they want to test the ground to see what the reaction would be from the international market," said an Iranian economist, who declined to be named.

But, the economist said he did not see it making sense for "any country or any institution to go into the market to raise money. The market is so chaotic."

Chief economist Stuart Culverhouse at frontier markets brokerage Exotix in London said: "Conditions would be pretty tricky for issuing a bond. Most new issuance has ceased or been suspended."

The Poul report did not give details on when Iran might offer the bonds and the central bank had no immediate comment.

It came after an Oil Ministry official this week said Iran's government needed up to $5 billion more to import fuel for the 2008-9 year, in addition to a previously budgeted $3.3 billion.

Iran is the world's fourth-largest oil producer, but lacks sufficient refining capacity to meet domestic needs, forcing it to import gasoline which it then sells at subsidised prices.

President Mahmoud Ahmadinejad is facing growing criticism over his economic policies ahead of next year's presidential election, with critics blaming rising inflation on his government's profligate spending of petrodollars.

Qazavi said a bond issue "could guarantee the flow of foreign assets to Iran and also foreign investors can safely invest... in various projects including petrochemicals."

Iranian officials have shrugged off the impact of sanctions, but analysts say Western firms especially are becoming more wary of investing in the country, including major oil companies.

Culverhouse said an Iranian bond issue would probably be a private placement rather than a global offer.

"Sanctions might quite possibly deter investors," he said in London. "But we have seen countries in similar circumstances issue to well-targeted regional investors - Sudan did that last year even though it was in default to Western creditors."

Fitch said in April it withdrew its ratings for Iran after its last remaining Eurobond issue matured and an analyst at the international ratings agency then told newswire Reuters: "We think any future bond issuance is highly unlikely."

Iran launched a 375 million euro ($472 million) bond in December 2002 along with a 625 million euro bond earlier that year - its first such issues since its 1979 Islamic revolution.

The other two major credit ratings agencies, US-based Standard & Poor's and Moody's, do not rate Iran because the sanctions bar US investors from holding Iranian bonds. (Reuters)

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