Iraq's Odious Debts

U.S. investors stay shy of Iraqi debt trade

Alex Skorecki
The Financial Times, U.K
June 27, 2003

London — Prices for Iraqi commercial debt have risen strongly since the fall of Saddam Hussein, but analysts say US investors are holding back from re-entering the market because of legal uncertainties, despite last month’s lifting of US financial sanctions. US investors are likely to provide an important market for Iraqi debt, but according to Richard Segal, director of research at Exotix, a brokerage specialising in illiquid emerging market debt, lawyers still have different interpretations of what is allowed under US law.

Virtually no interest payments have been made on Iraqi debt of any kind for some 13 years. Of the more than $100bn (€87bn, £60bn) of total debt, around $10bn is owed to commercial creditors. Last month, the US Treasury gave the go-ahead for US investors to buy Iraqi commercial debt in the secondary market, which had been banned since the invasion of Kuwait in 1990.

Bank of New York and JP Morgan Chase are both significant owners of debt which they have been prevented from selling or trading since 1990. The loans have mostly been acquired through takeovers and mergers of other banks.

Some of BoNY’s debt came from its purchase of Irving Trust, while JP Morgan Chase acquired loans from the Texas bank First City, from investment bank Manufacturers Hanover and other Chase holdings. JP Morgan is understood to be looking to trade the debt when the position becomes clearer.

Mr Segal said Iraqi commercial debt was trading at an average of 25-30 cents on the dollar, although the price varied widely according to the loans’ features.

Exotix calculates that the commercial debt should be valued in the range 23.2 per cent to 34.8 per cent, assuming 60-90 per cent overall debt forgiveness. It estimates about $3.5bn of bank loans and other private debt could be traded.

Some of the debt was lent to the state-owned Rafidain Bank. Although large parts of Rafidain are now in bankruptcy proceedings, the loans were guaranteed by the central bank and therefore claims are probably still valid.

Prices for the rights to a $500m loan to Rafidain made in 1983 have gone up from 8 cents on the dollar last September to 28 cents, according to Michael Lambert of Bermuda-based Emergent Alternative Fund.

The value of commercial debt is likely to be affected by developments with the much larger sovereign debt. The more relief there is for sovereign debt, the more pressure there will be for debt relief on the commercial paper.

The Paris Club, an informal gathering of national creditors including France, Germany and Russia, represents as much as $42bn of sovereign claims.

A better picture is expected in two weeks when the Paris Club completes its “data call”, detailing more accurately how much is owed to which countries. However, Exotix estimates Paris Club members could finally agree debt relief of 70-80 per cent.

The other factor affecting the value of debt will be overall national finances, which will improve once oil production increases. It is currently running well below full capacity.

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