Glencore is seeking to raise $550 million from investors via a debt issue guaranteed by oil from Iraqi Kurdistan in an attempt to secure a big slice of the high-risk - and high-reward - market in a region at war with Islamic State. Kurdish oil has been targeted by European traders over the past two years, during an industry downturn, since Erbil began selling oil independently from Baghdad. It has been relatively cheap due to the potential for supply disruptions and threats from Iraq's central government to sue anyone touching the crude.
The government of the autonomous Kurdish region in Erbil has borrowed around $2 billion from Glencore's rivals such as Vitol, Petraco and Trafigura to be repaid in oil. The companies have all borrowed money from banks and lent it to Erbil at their own risk. Glencore, whose trading division has been in the spotlight over the past two years as mining profits have declined, was the last merchant to enter the game earlier this year by lending $300 million to Erbil. The loan is being repaid by way of one mid-sized oil cargo a month, worth around $25 million.
Now the company is seeking a much bigger role in the region, but wants to split the risks by selling debt notes to be repaid with Kurdish oil income, according to a prospectus seen by Reuters. Technically, the money would be raised by a special-purpose vehicle, says the document which has been sent to a small number of investors and hedge funds who specialise in high-risk, high-yield investments and emerging markets. The debt is nonrecourse, meaning Glencore will not be liable should problems occur.
It says Glencore expects to enter into a new 5-year agreement with the government of Kurdistan to buy its crude, with deliveries rising from one cargo in January, to two in February-March, four in April and six from May onwards. Six cargoes a month would represent a quarter of overall exports from Kurdistan and would be worth over $1.7 billion a year at today's price of around $40 per barrel for Kurdish oil, and more than $8 billion over the course of five years. Glencore declined to comment. The risks of investments linked to Kurdish crude is reflected in the high returns offered in the debt issue.
Glencore's planned five-year note would carry an interest rate of 12 percent, according to the prospectus. That contrasts sharply with its other borrowings - it is currently buying back bonds carrying rates of 2.5 percent to 3.125 percent. The company is also seeking a 36-month grace period before it starts repaying the debt in monthly instalments, another reason why investors might expect a high return. "You can argue that in a way it is not Glencore but Kurdistan who is paying that interest rate as it is the ultimate borrower," said one industry source close to the deal.
While Glencore and rivals have loaned money to Erbil, sources have previously told Reuters, they have never publicly acknowledged such deals for fears of confronting the Iraqi central government, which says the Kurds have failed to respect deals to transfer agreed volumes of oil to Baghdad.