By Stanley Reed
Business Week Online, 12 January 2006
Every time Ali Allawi, Iraq's Finance Minister, makes the 12-mile journey from his home in Baghdad to his office, his life is at risk. He has come through so far, but his bodyguards have paid a terrible price. Six have been killed by groups trying to destabilize the government.
Yet in the midst of Iraq's violence, Allawi is starting to impose order on Iraq's chaotic finances. In the latest milestone, most of the nation's largest corporate creditors, dating back to before the 1990 invasion of Kuwait, have accepted a deal to swap the bulk of Iraq's commercial debt -- nearly $14 billion -- for new dollar-denominated notes. The notes will have a face value of 20% of what the companies are owed. "This will make it easier for Iraq to start getting the type of credits it needs for trade and business," says William Rhodes, senior vice-chairman of Citigroup (NYSE:C - News), which arranged the debt deal together with J.P. Morgan (NYSE:JPM - News).
The pact gives Iraq an important shot at rebuilding credibility in global financial markets at a time when the U.S. is expected to begin trimming its aid for the Iraqi economy. The securities, which will have a coupon of 5.8% per year, should start trading Jan. 19. They're expected to be in demand, in part because they're backed by the world's second-largest oil reserves.
HACKING AWAY
Among those signing on to the deal is South Korea's Hyundai Engineering & Construction, one of Iraq's biggest private creditors, with $1.65 billion. Other major creditors, sources say, include Japan's Mitsubishi group, France's BNP Paribas, and Italy's BNL.
The bond issue is just Iraq's most recent move to shore up its finances. When Saddam Hussein was ousted in early 2003, Iraqis were left with an estimated $130 billion in debt. Iraqi officials have been hacking away at it ever since the U.S. led coalition handed power over to a local government in 2004. Early on, they cut a deal with government creditors such as France, Italy, and the U.S. to reschedule some $40 billion.
Under the terms of this deal, 80% or more of the debt is likely to be written off if Iraq continues economic reforms. Iraq doesn't want to continue in "a financial twilight zone," Allawi says. It also pays 5% of its oil revenues, budgeted at $30 billion for 2006, to pay off reparations to Kuwait and other entities damaged by the 1990 invasion.
BEST AVAILABLE DEAL
Though numbers are smaller, restructuring Iraq's private-sector debt is even more critical for restoring its reputation in the international business community. At first glance, private companies balked at the prospect of getting no more than 20 cents on the dollar for the money owed them. But nearly all of them have knuckled under, concluding it was likely the best deal they would ever get. "Of course it isn't satisfactory, but we have decided to honor the deal," says a Hyundai spokesman.
How the new Iraqi notes trade will be an important indicator of the country's world standing. The companies that receive the securities are expected to begin selling them to financial players, including emerging-markets funds and hedge funds. Market participants think they'll find takers, especially since the notes will probably trade at a discount and thus yield 10% or so. "We expect a lot of interest from Arab funds, Europe, and the U.S.," says Mike Noone, head of sovereign research at Exotix, a London brokerage.
The risks are substantial. No amount of restructuring will make much difference unless Iraq's political turmoil stabilizes and the violence calms down. Still, unless Iraq collapses completely, its financial leaders should be able to keep edging the country's finances in the right direction.
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Citation: Stanley Reed. "Landmark Debt Deal for Iraq," Business Week Online, 12 January 2006.
Original URL: http://news.yahoo.com/s/bw/20060112/bs_bw/nf200601112427db039
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