New Form of Islamic Bond Makes Debut at Iran Fara Bourse

EghtesadOnline: The Iranian capital market hosted a new type of Islamic debt security on Tuesday, as the government issued 30 trillion rials (about $670 million) worth of Manfa’ah sukuk at the over-the-counter exchange Iran Fara Bourse.

News ID: ۷۸۲۰۲۲

13 March 2018

The 42-month bonds, bearing a maximum of 20.1% annual interest, will be backed by 51 trillion rials ($1.13 billion) of government revenues sourced from 100% of state-exclusive profits in National Iranian Oil Refining & Distribution Company and Telecommunications Infrastructure Company, as well as 78% in National Iranian Gas Company, Gholamreza Aboutorabi, the head of Capital Market Central Asset Management Company, announced.

Each Manfa’ah sukuk is priced at 1 million rials ($22.2).

Manfa’ah or usufruct sukuk are valuable financial deeds that indicate the ownership of the holder on a certain service or future profits of a durable asset, according to Financial Tribune.

Essentially, Manfa’ah is a derivative of Ijarah sukuk. The issuer divides its right of use of an identifiable asset over a predetermined period of time into specific units and transfers these rights to sukuk holders. The sukuk will be backed not by the issuer but rather by the asset or the cash flow generated from the asset.

"Bank Parsian, Maskan Investment Bank and Lotus Parsian Investment Bank have signed a standby underwriting agreement for 18 trillion rials ($400 million) of the sukuk’s total value," Aboutorabi told Bourse Press.

These bonds have no market maker. In case of selling less than the designated cap of 30 trillion rials, investors’ share of government revenues will be balanced accordingly.

Manfa’ah sukuk are meant to pick up where the recently issued banks’ certificates of deposit with 20% interest left off.

The Central Bank of Iran’s two-week CD issuance period, which were offering 5% more than the current deposit rates, came to a close last Thursday and served its purpose for the time: quashing a weeks-long US dollar rally against the rial that had caused turmoil in the foreign exchange market.

At the height of the forex market volatility before the unveiling of the 20% CDs, the rial was traded at 49,000 against the greenback, having plunged 14% since the start of 2017. Official sources currently quote the USD at 44,800-45,000.

Things seem to have come full circle since earlier this year, when cutting rates and funneling liquidity into equities and productive sectors were officials’ main talking points.

Risk-free, high-return investment options such as certificates of deposit and government bonds would naturally make investors shy away from risky options such as equity market investment.

This is while debt market yields had balanced at about 15% in the third quarter of the current fiscal year (Sept. 23-Dec. 21), following a turbulent six months of yields reaching up to 29% with investors decrying the disparity afflicting inflation, deposit interest rates and bond yields.

Cutting long-term deposit rates from 18% to 15% and setting short-term rates at 10% back in September 2017 caused bond YTMs to drop accordingly and stabilize.