The bonds’ underwriting announcement published on the website of the over-the-counter exchange states that the cash raised will go toward prepayment for the construction of Tehran-Qom-Isfahan high-speed railroad.
The 42-month Musharakah sukuk, traded at 1 million rials (about $20) each, are tax-free and bear 20% interest per year paid every six months. The Management and Planning Organization has guaranteed the bonds.
Musharakah bonds represent part-ownership of a particular project. Although they are similar to shares, they are subject to a limited duration of time and can be adjusted to have a higher ceiling of profit for bond holders, Financial Tribune reported.
Market statistics indicate that all of the two million bonds offered were sold out on IFB at about 11:42 a.m.
They were issued as per Clause C of Article 5 of the next fiscal year (starting March 21) budget law, based on which, the government is mandated to issue up to 260 trillion rials ($5.41 billion) of Islamic debt securities to finance the completion of projects across the country.
> A Modern Double-Track Line
Iran has signed a contract with China Railway Group Limited, also known as CREC, in 2015 to build a 415-km (260-mile) high-speed north-south rail line between Tehran and Isfahan via Qom–a modern double-tracked line running at 400 km/h.
CREC is a Chinese construction company listed in Shanghai and Hong Kong stock exchanges. The major shareholder of the company is the state-owned China Railway Engineering Corporation. By revenue, CREC was the largest construction company in the world in the 2015 Engineering News-Record "Top 225 Global Contractors".
China is also providing $1.8 billion in finance to the $2.7 billion project.
Germany's Siemens has agreed to provide a number of trains, signaling equipment and communication signs for MAPNA, a group of Iranian companies involved in the development of rail projects.
Italy’s state-owned rail company, Ferrovie dello Stato, is a consultant in the building of Tehran-Isfahan-Qom Railroad. The Italian firm is separately contracted to build a line from Qom to Arak. Though backed by the state’s export insurance agency, it says it needs a sovereign guarantee.
“We are finalizing the negotiations and we are optimistic about moving forward,” Riccardo Monti, chairman of Italferr, the state firm’s engineering unit, was quoted by Reuters as saying in December 2017, adding that the financing should be finalized by March next year.
A considerable part of the work will involve building or rebuilding stations and some of this has been won by AREP, the multidisciplinary design arm of French state-owned rail operator SNCF.
The project's completion has been scheduled for 2019.
> Bond Issuing Spree
Tehran Municipality issued the country’s first Musharakah sukuk in 1994, which has remained the main structure in use.
Eight years ago, the capital market regulators introduced other formats such as Ijarah and Murabaha structures—the latter is a cost-plus-profit format—and they have caught on in recent years with bond issuance volume reaching new levels.
For the past two months, bond issuance has grown 30% year-on-year during Dec. 22, 2017-March 14, 2018, to an unprecedented level of 80 trillion rials ($1.66 billion), the Persian daily Donya-e-Eqtesad reported.
This volume of debt issuance–most of which are Islamic Treasury Bills–coupled with the Central Bank of Iran’s looser monetary policies have caused yields to reach up to 23% for two-year bonds. This is while yield to maturity for most bonds averaged at 15% in mid-December.
The Economy Ministry is also selling another batch of Musharakah bonds worth 20 trillion rials ($416 million) under the same budget clause via select branches of Bank Maskan and Sepah.
The bond sale, which was launched on Saturday, will continue up to March 20, according to the ministry’s public relations. They are set to mature in two years and bear 15% and 17.5% floating interest for the first and second years respectively.
Throughout the process of reviewing the budget bill, MPs have repeatedly raised concerns that the government is becoming increasingly dependent on raising money by issuing debt to cover widening budget deficits while showing no signs of cutting expenditures.
The ratio of debt to GDP in the Iranian economy is larger than 60%, while the gross financing needs to GDP stands at 30%, according to a recent parliamentary study. This means that the debt balance combined with the financing required to pay the current debt is high compared with the government’s financial capabilities.
Nearly 740 trillion rials ($16 billion) worth of bonds will reach their maturity date next year, according to former governor of the Central Bank of Iran, Tahmasb Mazaheri.
On Saturday, the second batch of the new Islamic debt security called Manfa’ah sukuk valued at 20 trillion rials ($416.6 million) was offered on IFB.
The 42-month bonds bear an 18% interest and are priced at 1 million rials ($22.2) each. The government bonds are meant to finance buyback of bonds matured this fiscal year (March 21, 2017-18).
Manfa’ah or usufruct sukuk are valuable financial deeds that are indicative of the ownership of the holder on a certain service or future profits of a durable asset.
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.
The government issued the first batch of Manfa’ah sukuk last week amounting to 30 trillion rials (about $670 million) with a maximum of 20.1% annual interest and backed by 100% of government revenues in National Iranian Oil Refining & Distribution Company, Telecommunications Infrastructure Company and 78% in National Iranian Gas Company, according to the head of Capital Market Central Asset Management Company, Gholamreza Aboutorabi.