Iraq's Bond Drops to Lowest in Six Years on Oil Revenue Squeeze

Iraq’s only international bond declined to the lowest since September 2009 as the country’s prime minister said oil is costing more to produce than the nation makes in sales.

The debt is headed for a fourth week of losses as the yield on the $2.7 billion of notes due January 2028 rose 13 basis points to 9.49 percent at 2:58 p.m. in London, the highest since August 2009. Oil prices have dropped below the minimum level to cover the cost of crude production, news website Almada Press reported on Thursday, citing Prime Minister Haidar Al-Abadi.

Iraq Bond Price vs. Brent Crude Price
Iraq Bond Price vs. Brent Crude Price

Borrowing costs are rising as a 51 percent decline in Brent crude batters state revenue and the Federal Reserve moves closer to raising interest rates for the first time since 2006. The jump in yield comes as Iraq plans to tap the international market for the first time in a decade. The country announced a $6 billion bond program last month as it seeks to close a budget shortfall.

“I am not convinced that it’s the best timing to go to the market right now," said Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG. “They’re trying to come before any rate hike from the U.S., since a rise would add further to costs. It is really questionable whether they can achieve what they are looking for."

The securities will be rated six steps below investment grade by Standard & Poor’s, or B-, the ratings company said Tuesday. The country’s outlook is challenging because of its war with the Islamic State, fledgling political institutions and ethnic divisions, S&P said in a report this month.

An increase in oil production, which accounts for 90 percent of government revenues and 95 percent of exports, will help boost Iraq’s economic growth to an average 5.7 percent between 2016 and 2018 from an estimated 0.3 percent this year, said S&P.

Citigroup Inc., Deutsche Bank AG, and JPMorgan Chase & Co. were mandated to organize the investor meetings.

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