Govt may float $1b bonds backed by sovereign guarantees

Proposal of papers linked to company’s equity scrapped.


Express February 19, 2011

ISLAMABAD: With the ouster of privatisation minister Waqar Ahmed from the cabinet, his proposal to borrow $1 billion from the international market by issuing equity-linked convertible bonds has been scrapped by his successor.

A sub-committee of the Cabinet Committee on Privatisation, headed by Naveed Qamar, instead recommended floating exchangeable bonds backed by sovereign guarantees on Friday. Critics of the decision say the change in instruments for borrowing from the international market will add to the cost and the government will also miss the primary goal of raising money within the next four months.

The sub-committee was constituted on February 3 under the chairmanship of then privatisation minister Waqar Ahmed with members from the Planning Commission, finance and petroleum ministries. Privatisation Minister Naveed Qamar. The recommendation will be tabled in a meeting of the Cabinet Committee on Privatisation, headed by Finance Minister Hafeez Shaikh. Qamar’s decision is in line with the finance ministry’s stance.

Ahmed had floated the idea of raising money from the international market by issuing Oil and Gas Development Company’s shares, but it was opposed by the finance ministry on the plea that borrowing from the international market was the job of the ministry.

The money raised through convertible bonds is reflected on the company’s balance sheet and does not require sovereign guarantees. These bonds can be converted into a pre-determined amount of the company’s equity at certain times during its life, usually at the discretion of the bondholder.

Contrary to that, the money borrowed through exchangeable bonds is reflected as sovereign debt and has additional borrowing cost.

“A voluminous documentation has to be completed before the issuance of exchangeable bonds and there is an issue of time sensitivity,” said Ahmed while talking to The Express Tribune. He said in case of convertible bonds Pakistan can raise money within a month.

The cost of securing defaults on sovereign loans is rising again and touched 900 basis points after dropping to as low as 492 basis points. In the meeting, the sub-committee considered the methodology for implementation of the roadmap and agreed in principle that the Privatisation Commission and the Finance Division would jointly administer the flotation of papers in the oil and gas sector and listing of other enterprises.

The committee formulated recommendations for initial public offerings (IPOs) and secondary public offerings (SPOs) of public sector enterprises. It recommended secondary share offers to shareholders of Habib Bank Limited and National Bank of Pakistan. In case the existing shareholders refuse to buy more shares from the government, the shares will be offered in the stock market.

Published in The Express Tribune, February 19th, 2011.

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