Glencore is looking to raise $550 million from investors through a debt issue guaranteed by oil from Iraqi Kurdistan, Reuters reported, as the trading house seeks to establish a larger footprint in the highly profitable war-wrought region.
Kurdish oil has been targeted by European traders over the past two years, during an industry downturn. Erbil began direct oil sales to world markets in mid-2015 as it said Baghdad’s central government failed to respect a budget deal, depriving the Kurdistan Regional Government (KRG) of funds to pay state and army salaries as it seeks to defeat Islamic State militants.
Oil from Kurdistan 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.
Earlier this year, Glencore paid Iraqi Kurdistan $300 million as an advance for oil Erbil, which will started allocating it crude from mid-year. 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.