New-Issue Frenzy Gets Wake-Up Call From Latest Troubles in Iraq

(Bloomberg) -- Iraq’s Kurds have given a wake-up call to investors who piled into an oversubscribed sovereign bond sale from the country less than two months ago.

The nation’s $1 billion of Eurobonds due in 2023 slumped on Monday, with yields jumping to 7.29 percent, or 61 basis points higher than when the bond was sold in early August, as tensions flared between the Iraqi government and the nation’s semi-autonomous Kurds. Iraqi soldiers moved late Sunday to take over oil fields in the northern city of Kirkuk from Kurdish forces.

Investors placed bids almost seven times the amount on offer for Iraq’s August bond sale, which came just three weeks after the country declared victory over Islamic State in its second-biggest city. The sale was part of a flurry of issuance from junk-rated countries including Tajikistan and Ukraine as borrowers sought to take advantage of demand for high-yield debt.

“We’re living in a very low-yielding world and people are stretching their limits and going where they shouldn’t be going,” said George Zois, director of emerging-market sales and trading at Mint Partners in London. “People are starting to cotton on to the fact that the Kurdistan issue has legs and things are going to get worse before they get better.”

Oil Prices

Investors who took part in Iraq’s bond sale cited the recovery in oil prices over the past year as a positive for the country, which has the world’s fifth-largest reserves. Brent crude climbed above $58 a barrel on Monday on concern the latest tensions will disrupt supplies from a region that’s home to Iraq’s oldest producing oil fields.

Zois said he wouldn’t feel comfortable recommending the nation’s bonds to clients unless they yielded at least 10 percent. Yields on the nation’s 2028 bonds breached that level during the 2015 oil price crash. The debt is rated B-, or six levels below investment grade, by S&P Global Ratings.

“These bonds trade around Iraq-specific risks,” said Abdul Kadir Hussain, the head of fixed-income asset management at Arqaam Capital Ltd. in Dubai. “When there is headline risk, as you have these days, the bonds tend to underperform because everybody suddenly remembers that Iraq is a relatively unstable place.”

To contact the reporters on this story: Natasha Doff in Moscow at ndoff@bloomberg.net, Arif Sharif in Dubai at asharif2@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Robert Brand, Todd White