Posted On

– courtesy Khaleej Times
ISLAMABAD – Pakistan has made a splash in the global big bond business at attractive prices for the international investors, which suit it,too.

In the second of three splashes, Middle East, Gulf, and Saudi Arabian investors have topped in snapping up Government of Pakistan (GOP) Pakistan bonds followed by Asians and Europeans. This is the result of the Pakistan’s second bond issues in less than ten months. But, it’s the first, though globally the biggest ever, Islamic instrument “Sukuk” – Pakistan has issued.

The first issues, Eurobonds, were offered in February 2004. The third global bonds will be floated in December this year.

In the first bond issue of 2005 in the international market, and the first offshore sovereign float, Pakistan, this week, received, $ 1.2 billion (b) offers for Sukuk Islamic bonds, of which it accepted $ 600 million. Although the prevailing impression in the bond and the money markets was that it may accept anywhere between $ 500 to 750 million offers. Ministry of Finance (MoF) officials says they were, actually, toying with the idea of accepting $ 500 million offerings. The size was increased, following the investors’ overwhelming interest, reflected in the $ 1.2 billion (b) offerings.

The bonds are priced at 220 basis points over the six-month London Inter Bank Offered Rate (LIBOR). It’s still better for the GoP because the initial price guidance for the issue was 220 to 235 basis points above LIBOR. ” These Sukuk prices are better than Eurobonds, we floated in February 2004,” Prime Minister Shaukat Aziz said, after the deal was closed this week. Eurobonds were priced at 375 points above LIBOR. The offered investment had totaled $ 2.0 billion out of which Pakistan accepted only $ 500 million, at 6.75 per cent, with maturity due in 2009.

The GoP decision to go to the Eurobond market in February 2004 had drawn considerable domestic criticism at that time, mainly on two counts: the price was too high, and Pakistan did not need the money because its forex reserves, at over $ 10 billion (b), were quite comfortable to fund its imports and repay foreign debt due at that time. But, Aziz, who was Finance Minister at that time, had defended the decision to go to the bond market on the ground that Pakistan needed to test its sovereignty in the financial global market, test the strength and fruits of the government’s four-year long financial reforms, and wished to prepare for its migration from IMF funding to the international market.

Some of the expected burden of the costly bonds was mitigated through swap arrangements. After the Eurobond placement in the international market by JP Morgan, Deutsche Bank and ABN Amro Bank, Pakistan finalised a deal with Standard Chartered Bank to swap the Eurobonds at 3.2275 percent over 6-month LIBOR. In the secondary market the bond is now being traded at 217 basis points over LIBOR. Given the current 6-month Libor of less than 3.0 per cent, the total cost to GoP, or yield to investors will be around 5.0 per cent.

This week’s Sukuk floatation is the largest Islamic bond ever issued internationally . The bonds have a five-year maturity period, ending 2010. The lead managers for the Sukuk were Citigroup and Hong Kong & Shanghai Banking Corporation (HSBC). Sukuk are Islamic Shariat Law compliant instruments. Islamic Shariat disallows payment of interest on any financial transactions. Because of this, Sukuk investors will receive profit yielded by approved investments of the GoP. This is the sixth Sukuk launched globally by various countries .The launch follows upgradation of Pakistan’s financial ratings.

Aziz, before the launch, had said the Sukuk will be geared to the requirements of prospective investors from Islamic countries, particularly, Saudi Arabia, Gulf, and the Middle East, as well as Muslim population of several Asian countries. This is how his expectations came true when the bonds were actually offered this week. Investors from Saudi Arabia, Gulf and the Middle East lapped up 47 per cent of bonds. Asia picked up 31 per cent, followed by Europe 22 percent. GoP officials undertook pre-launch road shows in Saudi Arabia, Dubai, Bahrain, Kuwait, Switzerland, Singapore, and Hong Kong – offering the Islamic bonds.

Who bought the bonds? State and government-backed entities and businesses turned out to be the biggest investors with 24.5 per centpurchase. Asset managers picked up 23.45 per cent, Islamic Banks 20.3 percent, other banks for trusts 18.3 per cent, private banks 10.7 per cent, corporates 2.0 per cent, and insurance companies 0.8 per cent.

“Pakistan is reflecting its sovereignty by going to the bond market, on good terms, that reflect our financial health. We have, in this way, migrated from I.M.F. funding to the global bond and money market as we are now in a position to attract cash on very favorable terms,” Aziz says. Islamabad has just completed IMF’s Poverty Reduction & Growth Facility (PRGF) funding of $ 1.52 billion (b) that covered 2002 to 2004. In fact it did not use the last two tranches of PRGF, as it had generated considerable domestic resources and strengthened its forex reserves to more than $ 11 billion (b).

In order to comply with Islamic Shariat, Sukuk bonds will be fully backed by state-owned assets, including the 400-kilometer Islamabad-Lahore Motorway, called M-2. The government’s National Highway Authority (NHA) administers the Motorway, the best in Pakistan’s motorway-highway networks. GoP has formed Pakistan International Sukuk Company Ltd. ( PISCL) that will issue trust certificates, through lease agreement.

The periodic payments on certificate will be described as “rentals on assets,” or ‘Ijara,’ rather than interest, so that Sukuk remain Islamic Shariat compliant. Pakistan undertakes irrevocably to purchase the land at the agreed exercise prices, on dissolution. When this trust is dissolved in 2010, and upon receipt of the exercise price payable by Pakistan, along with rentals payable under the ‘Ijara’ agreement, up to the date of Dissolution Distribution Amount, will be applied to redeem the Sukuk certificates.

Pakistan went in for Sukuk, because globally, the demand for Islamic products and financial instruments is currently growing at 15 percent a year. The present, globally accumulated investment in Islamic instruments is estimated at $ 270 billion (b). Moving away of a number of Islamic funds from U.S. markets, after 9/11, appears to have helped investment in Pakistani Sukuk, as well as Islamic instruments of other countries and financial institutions.

Pakistani officials are quite upbeat on the results for the Sukuk flotation and large investor offerings. Dr. Ishrat Hussain, Governor State bank of Pakistan (SBP) the central bank, says “we have regained our financial sovereignty due to the country’s economic turn around. The economic reforms introduced over the last five years which are irreversible, are now paying off. Pakistan was being run by external creditors five years back, and was obliged to accept their tight conditionalities to get the loans. During the last four years, Pakistan received 16 tranches from IMF by completing its programme which was a record, but now we have said Goodbye to IMF.” he said.

The GDP growth has gone up from less than 5.0 per cent four years ago to 6.6 per cent this year. The repayment of debt, that previously consumed 60 percent of the annual tax revenue, is down to 25 per cent, providing fiscal space to the government for larger development spending.

If the offerings and pricing for Sukuk are so good, wouldn’t the December-2005 bond float be better still?