Euromoney, September 12 2019
It’s not long ago that Kurdistan was on the brink of accessing the international markets. Then came ISIS, strained relations with Iraq and the challenge of being shackled to a state from which the population wants independence. Is Kurdistan ready to approach world markets again?
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In 2015, Deutsche Bank and Goldman Sachs were tasked with an unusual mandate: sounding out international institutional investors on the prospects of a bond from Kurdistan. To which the first question of many investors was: what’s Kurdistan?
There is no official country of Kurdistan; there are regions of both Iran and Iraq that carry that name informally, but it isn’t a sovereign state. On the Iraq side, the 2005-approved constitution set Iraq up as a federation of 18 provinces, of which three, jointly – Erbil, Sulaymaniyah and Duhok – are considered a semi-autonomous region under the Kurdistan Regional Government (KRG). (The decision in 2014 to turn Halabja into a province made Iraq 19 provinces and Kurdistan four.)
Kurdistan has its own government, the KRG, and it would like to be independent from Iraq, but that’s not immediately on the cards.
Nevertheless, back then, it seemed that the region – usually far safer than the rest of Iraq, with direct flights into its cities of Erbil and Sulaymaniyah on international airlines such as Lufthansa, Emirates and Qatar Airways – could at least issue in its own name.
“If you look at the federal laws versus the regional laws, it’s stated that anything that isn’t mentioned as a federal authority could be legislated by the provinces themselves,” says someone who was involved in the original pitch.
“That includes debt. The region [of Kurdistan] should be able to establish its own borrowing capacity as a sub-sovereign. Other provinces globally are able to issue bonds; in the US you have municipal bonds. That was the idea.”
At the time, Kurdistan was something of an oasis, a special case in turbulent Iraq. Rabee Securities, the brokerage, used to run an annual conference there. The region had its own armed forces and its own borders within Iraq itself.
But then there was a problem: ISIS. When the group took control of Mosul, which is a matter of miles from Kurdish territory, the whole security situation changed. The conferences stopped and so did foreign interest in the region.
That gave the bond an uneasy context, as Euromoney wrote in 2015, since one explicit need for the funds was to fight ISIS. “Do institutional investors want to be financing wars, no matter how much they might appear to be backing the more just side?” we wrote. “Just how comfortable can one be with the repayment profile if it depends somewhat heavily on not losing that war?”
That, however, is apparently not the main reason the bond didn’t go ahead. Instead, it was more to do with the budgetary relationship between the federal and regional government, and how that fed into the credit story bankers were putting to investors. At the time, about 12% to 13% of the federal budget of Iraq supported the Kurdistan credit story, since that was the allocation to the relevant provinces from the national coffers.
“When we met with investors, that is how we drafted the credit story: that budgetary relationship,” remembers one banker. “But at that time a couple of things happened. The relationship between the government and the KRG started to deteriorate. The KRG started to speak about independent oil sales, which exacerbated tension.”