OilPrice.com:

Given that China has put its expansion into Iran on hold for the time being due to the backlash in Iran on the extent of such plans, Tehran is now looking at ways in which it can plug the initial US$280 billion that had been expected from China to develop its oil, gas, and petrochemicals sectors. As U.S. sanctions make direct investment by foreigners extremely difficult and also act as a brake on international investment flowing into the Tehran Stock Exchange, the bond market looks like the only fund-raising game in town for Tehran. The chief executive officer of the National Iranian Oil Company (NIOC), Masoud Karbasian, said last week that Iran is looking at a range of such offerings and, following extensive talks with various senior figures in Iran connected to the Petroleum Ministry, OilPrice.com can now confirm to know what these options are.

Although Iran is in no position to raise capital through a Western-oriented traditional bond denominated in a mainstream currency, its prospects in the global sukuk (Sharia-compliant) market are actually very good. This type of bond has often been used by Middle Eastern countries in the past when they have been uncertain of how a more traditional bond issue would be received by international investors for whatever reason and this is clearly the case with Iran. Targeting such a specialized investor base has the advantage that the pricing for sukuk is generally lower than for a traditional bond issued by the same country. “The appeal of sukuk is determined by its spread - nominal value – not against the usual benchmarks but rather against sukuk alternatives as well as high-yield bonds issued by Iraq, Mongolia, Kazakhstan and even Pakistan,” a London-based risk analyst told OilPrice.com. “However, U.S. sanctions have inserted a significant additional discount in the computation of yield, spread and spot pricing,” he said.

Part of Iran’s appeal to the sukuk investment community – which ranges from the U.K. (the first Western country to issue a sukuk), through Germany and Turkey (key European hubs for sukuk) to Malaysia (the biggest sukuk centre in the world) - is that it is a truly Islamic issuer. The investment universe of sukuk became a lot more skeptical of purported Sharia-compliant offerings during the financial crisis of 2008. The Accounting Auditing Organisation for Islamic Financial Institutions – the Islamic finance standards watchdog – said as long ago as February 2008 that the repurchase undertakings found in around 85% of apparently Sharia-compliant bond- and equity- fund structures that were based on ‘mudaraba’ and ‘musharaka’ principles violated the Islamic duty to share risk.

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