Pakistan sells $500m Eurobond at 6.57pc: Orders reach $2 billion

Society Pakistan & World Affairs
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LONDON, Feb 12: Pakistan’s Eurobond launch lived up to high expectations on Thursday, as a heavily oversubscribed $500 million deal reopened the international market for the nation’s debt.

The bonds priced at par with a coupon of 6.75 per cent, well below initial guidance of 6.875 per cent. “The bond offers investors exposure to an improving credit with great scarcity value. Most people were content to buy bonds at the tight end of the range because they were committed to participating,” said George Niedringhaus, syndicate official at ABN Amro.

Pakistan last visited the international debt market in 1999, with $623 million in Eurobonds due 2005. The new bond presented a rare opportunity for investors whose appetite for high-yielding emerging-markets assets has been tested by a heavy $17 billion of new issuance so far this year.

Word from the roadshow was that the order book filled almost immediately, and orders reached $2 billion by the time it wound up in London on Wednesday. Over 200 accounts signed up for the transaction, which was lead managed by JP Morgan, ABN Amro and Deutsche Bank.

Marketing began in Bahrain on Sunday and followed up in Singapore, Dubai, Abu Dhabi, Frankfurt, Hong Kong and London. On the final day of the roadshow, syndicate officials reported that pricing had narrowed to 6.75pc-6.85pc, from initial guidance of 6.875pc.

Positive reports had raised speculation that the deal would be increased beyond the $500 million offer. “The issuer did review possibilities for an upsize but was satisfied that $500 million was appropriate,” said Niedringhaus. “This was a chance to pay down existing debt, lengthen maturities and, most importantly, reintroduce (Pakistan) to the capital markets.”

European accounts were heavily represented, at 54pc of total subscriptions. Buyers from Asia made up 24pc, followed by Middle Eastern investors at 11pc. The bond was not available to US onshore investors, but offshore accounts picked up another 11pc of the offer.

The majority of buyers were fund managers, at 38pc of the total, while hedge funds, traditionally seen as more opportunistic investors, accounted for 7pc. Finance Minister Shaukat Aziz flagged the deal in October last year, with emphasis on its strong prospects following the country’s ratings upgrade to B2 by Moody’s Investors Service. The accompanying B rating from Standard & Poor’s places the sovereign one notch below Turkey.

Nevertheless, the yield on Pakistan’s bond compares closely with Turkey’s dollar bond due 2009. The Turkish bond launched in November last year with a much higher coupon of 11.75pc, and currently yields 6.51pc. Turkey’s bond offers a 3.5pc pickup over Treasuries, compared with 3.7pc for Pakistan’s bond.

With economic growth at 5.3pc and relatively low inflation of 5.1pc, Pakistan’s economic fundamentals compare favourably with Turkey. The yield differential between the two can be attributed to political risk factors. Pakistan’s ties with the US have improved greatly owing to the diplomacy of the government of President Pervez Musharraf over the war on terror, most specifically in ousting the Taliban regime in Afghanistan.

**“On a strict credit rating, we rate Pakistan slightly better than Turkey,” ** said Nicholas Field, asset manager at West LB. "But you have to look at each country’s ability to deal with crises.

The (International Monetary Fund) and US support for Turkey is longer held, and deeper ingrained." However, he added that “at these prices, we consider both to be very expensive.” -Dow Jones Newswires

http://www.dawn.com/2004/02/13/ebr4.htm

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Investors jump back on the Pakistan merry-go-round

Pakistan completes a hugely successful bond issue, but where is the upside?

The Federal Republic of Pakistan returned to the international bond markets yesterday (Thursday) with its most successful bond to date. Under the lead management of ABN AMRO, Deutsche Bank and JPMorgan, the sovereign priced a $500 million five-year fixed rate deal at par on a coupon of 6.75% to yield 370bp over Treasuries, or 335bp over Libor.

After completing a week of roadshows, the B2/B-rated credit managed to accumulate an order book of just over $2 billion. Such large demand facilitated pricing right at the tight end of a revised indicative range between 6.75% and 6.875%.

Just over 200 accounts participated in the deal, of which 54% came from Europe, 24% Asia, 11% offshore US and 11% Middle East. There was no direct placement in Pakistan. By investor type, fund managers took 38%, banks 30%, retail 22%, hedge funds 7% and others 3%.

All involved acknowledged the impressive roadshow skills of government officials led by finance minister Shaukat Aziz. A number also hoped the bond’s success can further strengthen the platform of the Musharraf government as it pushes forwards with its sweeping programme of structural reform.

**Most surprisingly of all, Pakistan priced through all of its comparables.

The most direct comp is cited as B1/B+ rated Turkey. With a one notch higher rating from both agencies, Turkey should trade at least 30bp through Pakistan.

Pricing of the latter’s deal has, however, has come only 5bp wider, since Turkey’s 12.375% 2009 bond was bid at a yield of 6.70% at the time of pricing.

So too from Asia, there is the much higher rated Ba2/BB-rated Republic of the Philippines with a March 2009 bond outstanding. This was bid at 7.15% earlier yesterday to yield 378bp over Libor, some 43bp wider than Pakistan.

**
…

**The headline figures are said to have impressed investors. On every ratio Pakistan is now beating even the best figures it achieved throughout the 1990’s. For example, whereas GDP growth averaged 4.6% during the last decade and fell to a nadir of 2.6% in 2000/2001, it shot up to 5.1% in 2003.

Where budget deficits have averaged 7.2% for the last two decades, the figure had fallen to 4.5% in 2002/2003. This in turn meant that debt as a percentage of GDP fell from a high of 102% in 1998/1999 to 90% last year.

As JPMorgan wrote in a recent credit report, “Pakistan’s multi-pronged strategy of retiring expensive debt, borrowing from multilateral development banks and conservative fiscal stance has gone a long way to ensure that it returns to a more sustainable debt re-payment profile.”

As a result, debt-servicing costs have fallen from 63% of fiscal revenue in 1999 to 36% in 2003. Foreign exchange reserves also stand at an all time high of $12 billion, equating to over a year of import coverage.**

For full article: http://www.financeasia.com/articles/1E40DDED-8020-48F1-8AF3481F95A8D7E6.cfm

I think Shaukat Aziz coupled with Ishrat hussain and Hafeez Sheikh have been the best Finance managers we’ve had in a long time. Actual professionals running the finances instead of run-down old hags such as Sartaj Aziz is starting to show its results. Lets hope we can persis with this team and its policies for the next 5-10 years at least. :jhanda:

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‘Over-subscription for bonds proof of economic stability’

LONDON: Finance Minister Shaukat Aziz said on Wednesday that over-subscription of over $1 billion ($2 billion according to latest reports) to the $500 million Eurobonds despite stiff competition was evidence of a stable economy and success of the government’s economic policies.

The minister was speaking at a dinner hosted for him by Standard Chartered Bank and the Pakistan-Britain Trade and Investment Forum in London.

The minister said the launch of the five-year Eurobonds would bring Pakistan back in the international capital market, which was a significant development after an absence of seven years. Mr Aziz also said that floating Eurobonds would help the country become self-sufficient and reduce its dependence on the international financial institutions.

Mr Aziz, State Bank of Pakistan Governor Dr Ishrat Hussian, Finance Secretary Naveed Ahsan and Advisor to the Ministry of Finance Dr Ishfaq Khan were also present on the occasion. Pakistani High Commissioner to the UK Dr Maleeha Lodhi, Sir Anwar Pervez and executives of many bank and business companies were also present. Mr Aziz told them that he and his team were anxious till a few days ago because they were not sure about the market’s reaction but the positive response generated by Eurobonds had got him in an upbeat mood.
**The finance minister said a few years back Pakistan was facing difficulties in paying its oil bill and in servicing its debt but now it had reserves to cater to 12 months of imports. He said the inflation rate in Pakistan was down to 3.3 percent, gross domestic product (GDP) was expected to soar to 6.6 percent this year :eek: and the currency was stable. The minister said the per capita income in Pakistan, which was $418 two years ago, had increased to $449 and was expected to reach $600 next year. **He attributed this development to economic reforms introduced by the government during the past four years.

He said GDP growth in excess of six percent was attractive for investors but the government was not complacent after its achievements and was introducing more reforms to ensure Pakistan stayed competitive in the global economy and also to harness the potential of 150 million people of the country. Mr Aziz said foreign investment in the country had reached $1 billion but it was not nearly enough when compared to the investment pouring into China and the ASEAN countries because the macro-economic situation in South Asia was not as good as ASEAN and China.

He said the Government of Pakistan was now setting up processing zones for investors and was encouraging them to make Pakistan their potential production site because the country’s location would help them export their products to the Middle East, South Asia and the Central Asian republics. China, he said, was an important player in Pakistan’s economy and its companies were earning profits. The minister said many British companies had businesses in Pakistan and were earning handsome returns.

Taking questions later, Mr Aziz said the Government of Pakistan had put its growth targets for the next five years on the Internet, which made it accountable to the people and kept it under public pressure to realise those goals. The key, he said, was that the current policies would be maintained. Referring to the recent peace moves initiated during the SAARC summit in Islamabad, Mr Aziz said the reduction in tension in the region would have positive impact on the economy.

He said Pakistan’s trade with Afghanistan had soared to $1 billion from $50 million a couple of years back. He said the government was pursuing privatisation with full vigour and was also taking steps to promote housing and construction industries because they were the best job providers. He said the textile sector was getting the government’s highest attention. —APP

http://www.dailytimes.com.pk/default.asp?page=story_13-2-2004_pg7_36

GDP growth rate of 6.6%??? Lets hope he’s on the spot. Last year he was very conservative about projections and he kept projecting a growth rate of arounf 4.9 % but the final figures turned out to be 5.1%. Even for this year the projected growth rate was 5.3%.

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Praise be to almighty Allah...

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Some superb achievments the Finance minister has higlighted...

Finance Minister Shaukat Aziz said on Wednesday that **over-subscription of over $1 billion to the $500 million Eurobonds* despite stiff competition was evidence of a stable economy and success of the government’s economic policies.

The finance minister said a few years back Pakistan was facing difficulties in paying its oil bill and in servicing its debt but now it had reserves to cater to 12 months of imports. He said the inflation rate in Pakistan was down to 3.3 percent, gross domestic product (GDP) was expected to soar to 6.6 percent this year and the currency was stable. The minister said the per capita income in Pakistan, which was $418 two years ago, had increased to $449 and was expected to reach $600 next year. He attributed this development to economic reforms introduced by the government during the past four years.

He said Pakistan’s trade with Afghanistan had soared to $1 billion from $50 million a couple of years back.*

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Economic growth is in the air

There are many signs that the economy is poised for a sustained growth spurt

Our GDP growth last year, at 5 percent, was the highest in South Asia. This rate of growth would be enviable for a large part of the developed and developing world. Japan, in the economic doldrums for the last decade, would celebrate such a milestone, as would the US and many European countries. We too should rejoice because it reflects a substantial improvement on the dismal performance of the previous three years.

There are two reasons for continued worry. One is that this may be a flash in the pan and that growth may again dip back to the miserable rates of the previous years. The other is that the neighborhood, i.e., India and China, is growing even faster at 7-8 percent. And the feel-good sense that comes from economic growth, like wealth, is relative.

Barring major shocks to the system, the chances are pretty good that improvement in the current rate of economic growth will be sustained, even surpassed. This is because the economy is much better positioned structurally to spur economic growth today than ever before. Improvements in macro-economic fundamentals are impressive. Reserves are at an all time high, national debt is coming down more quickly than anyone had predicted and tax revenue is climbing. Significantly, the external financing situation has never been as good. International Financial Institutions (the Asian Development Bank and the World Bank) have substantially increased concessionary lending and many bilateral donors, in particular Japan and the US, are back in a big way. The rupee is thus stable which makes it an attractive currency for savers and investors.

Reduction in national debt and interest rates and increased tax revenue are beginning to create the much needed fiscal space to expand public investment. Gone are the days of belt tightening to generate primary budget surplus of around 3.5 percent to prevent the debt from exploding. The government can now pump an additional 2 percent of GDP into the economy to increase outlays in the social sector and improve the infrastructure. This will create additional jobs and incomes and will spur further growth.

The initial positive response to these developments can be seen clearly. Major urban centres such as Karachi, Lahore and Islamabad have enjoyed a massive real estate boom. Last year, the Karachi stock exchange was the best performing stock market in the world. And there is a run on consumer durables; cars, air conditioners and household electronics are being snapped up as never before. Even the fiercely competitive cloth stores are witnessing unprecedented sales.

A huge, and unsung, success story is the major turnaround in the banking sector. Ten years ago, the sector was dominated by nationalised banks that had gaping holes in their balance sheets due to un-serviced loans made out to cronies and charlatans. In truth, the banks were bankrupt. Today, most banks have been restructured, their bad debts cleaned up and hangers on replaced by skilled professionals. The largest banks have been privatised and are being run on modern lines with much improved services.

The rejuvenated banking sector has responded by a nearly threefold increase in credit to the private sector. And it is not all going into real estate and personal consumption. A good 40 percent has gone into manufacturing to finance machinery imports.

But structural reforms that are the foundation for sustained economic growth go far beyond the banking sector. Our trade policy regime is now the most open in South Asia, barring Sri Lanka. What this means is that imports are competitive so that our manufacturers and service providers have access to the best quality machinery and other inputs to compete internationally.

Agriculture sector mercifully is also free of crippling price distortions. Indian Punjab farmers are subsidised to the hilt both on the input and output side. Consequently, they are stuck in the wheat/rice cycle with stagnant productivity. Free of such subsidies, our farmers have started to diversify crops. As investments begin to flow into agriculture, farmers will harvest a rich bounty of second-generation green revolution.

Importantly, the continued improvement in relations with India is beginning to remove the risk of a catastrophic war. Rid of the war risk, the investor can now begin to focus on the more manageable risks associated with normal business activity. This will spur investment. Moreover, opening up of new markets in the East, frozen for over fifty years, will create a large vent for growth that is likely to be sustained for many years.

The international financial markets have taken in all this and have started to send positive signals about Pakistan’s economy. Government bonds recently offered in several international markets were oversubscribed. Even disclosures of nuclear proliferation were brushed aside by the market as it revealed a low risk premium on government paper.

By word and, increasingly, by deed, the government is distancing itself from the obscurantism that had dominated the official milieu for twenty years. Obscurantism fuels extremism and that, in turn, plays havoc with rule of law. Without rule of law, markets do not function and investors are discouraged. The ideological shift in Islamabad is being welcomed by investors as seen in the increased number of companies registered with the SECP.

What is all this doing to income in the pocket? Pretty good, if you ask my plumber. Not so long ago, I would send a message to his house via a neighbours’ telephone and he would arrive promptly the next morning to fix whatever needed fixing. Now he has a cell phone and a seven-day waiting period before he can attend to me. The twinkle in his eye suggests that the economy is beginning to work for him. *

http://www.dailytimes.com.pk/default.asp?page=story_20-2-2004_pg3_2

:k:

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Shahid Kardar makes a valid point, what ws the reasoning behind paying a billion dollars in debt repayment and then floating a 500 million dollar bond?

Increasing debt obligations

By Shahid Kardar

BY all accounts Pakistan’s return to international capital markets after a gap of seven years has been a resounding success and a ringing endorsement of the policies of the government.

The market’s response to the government’s five-year US $ 500 million Euro Bond offer has been inspiring, reflecting the greater confidence in Pakistan’s economy and recognition of the improvement in the country’s key economic indicators, due partly to better financial management and in large measure to a turnaround in our fortunes arising from the events of September 11.

The bond has been heavily over-subscribed, the bids in the order book totalling over four times the amount offered for subscription.

The international capital markets are ostensibly being tapped to test their reaction to Pakistan’s re-entry after the ill-fated first attempt in the late 1990s (when the bonds issue of that time had to be rescheduled in 2001/02), to diversify the government’s sources of funding and to reduce dependence on multilateral lending agencies for financing.

The raising of Moodys and Standard and Poors ratings by a notch and the impressive launch is also expected to facilitate Pakistan’s reappearance on the radar screens of investors, thereby working up investor appetite for Pakistan’s debt instruments, enabling the country to become a regular visitor to international capital markets in the future.

It is being hoped that these developments will not only serve as good indicators for attracting private direct foreign investment, but also help in lowering the interest rates on which Pakistan will henceforth be able to borrow from these markets.

However, despite the above stated reasons for accessing capital markets it is difficult to discern the economic and financial justification that underlay this move. Obviously, the need for liquidity or for settling immediate obligations cannot have driven this decision.

As it is, the country has foreign exchange reserves close to $12 billion, the bulk of them in the form of a non-interest bearing asset, cash. With the government struggling to find ways of utilizing this mountain of reserves one is at a loss to understand what it wants to, or can, do with the additional $ 500 million raised at 6.75 per cent.

It would, at best, earn a relatively nominal return from its investment in other income earning instruments. The overall outcome of such a transaction would be a net capital outflow, since the servicing cost of the bond would be higher than the income stream from the proceeds of the bond sales.

** Moreover, just a few days ago the government retired expensive Asian Development Bank loans of $ 1.2 billion and even paid a penalty for prepaying them (details of the interest rates on the credits and the penalties levied by ADB for early redemption are not available).
It is, therefore, puzzling that it has chosen to raise fresh debt at interest rates higher than those that would be applicable on commercial loans from Asian Development Bank and World Bank.
**

The government needs to present its case defending the financial and economic rationale for the decision to float bonds at such a high interest rate, and at a time when the interest rates on loans in international markets are the lowest in recent memory.

In the opinion of this writer the government’s efforts would be better spent removing the remaining impediments to the creation of a more friendly environment for investment, instead of expending its energies in areas that will increase the country’s liabilities for uncertain gains.

The writer is a former finance minister of Punjab.
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