ADB, AIIB back $250m Panda bonds

Two multilateral development banks have agreed to provide $285 million in guarantees to help Islamabad raise $250 million in debt through the issuance of Panda bonds, as the country's poor credit rating remains a hurdle in entering international debt markets without a protective umbrella.

Government sources told The Express Tribune that the boards of these banks will approve the guarantees after the government completes internal approval procedures. The matter has already been placed before the Concept Clearance Committee and the Central Development Working Party (CDWP) for the requisite approvals, they added.

The Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB) have agreed to provide the guarantees only after Pakistan committed that the loan would be utilised to fund green and environment-friendly projects. Both lenders will charge between 0.8% and 1.25% in fees in return for giving guarantees to foreign private lenders, said the sources.

Pakistan wants to enter the Chinese debt markets for the first time, but its poor credit rating, despite some recent upgrades, remains a challenge. To overcome this weakness, the government reached out to the ADB and AIIB for guarantees, which will be issued directly to foreign private lenders, the sources said.

An amount of $76.5 million will be used for the installation of a Telemetry System for Real-Time Discharge Monitoring at 27 key sites on the Indus Basin irrigation system. Another $71 million will go to the Power Distribution Strengthening Project, which is already funded by the ADB.

Nearly $27 million has been earmarked for the procurement of equipment for establishing a cancer hospital in Islamabad, while $76 million is meant for the Jinnah Medical Complex and Research Centre.

The ADB will provide a guarantee of up to $160 million, while the AIIB will cover up to $125 million in debt, said the sources. Together, these guarantees will back the outstanding bond principal and accrued but unpaid interest obligations with a 95% indemnity.

The finance ministry has recently stated in a meeting that given Pakistan's current sub-investment-grade sovereign credit rating, a credit enhancement guarantee is required to secure a domestic AAA rating for the Panda bond in China. The Panda bond market in China is high grade, and investors only invest in investment-grade bonds. However, reliance on ADB and AIIB guarantees, despite the umbrella of the International Monetary Fund (IMF), raises questions over the effectiveness of the current $7 billion bailout package. Unlike in the past, this time the IMF programme is not helping the country in a significant way, and the central bank also had to buy over $8 billion from the local market to meet external financing needs.

The government plans to raise an aggregate principal amount of $250 million equivalent in RMB through its listed Panda bond issuance programme on China's national interbank bond market, subject to acceptance of programme registration from China's National Association of Financial Market Institutional Investors (NAFMII). This issuance is part of a larger Panda bond programme with an overall ceiling of $1 billion equivalent in RMB, which the government will issue from time to time.

According to sources, the ADB will charge an annual guarantee fee of 50 basis points, a one-time commitment fee of 15 basis points, and an upfront fee of 25 basis points. Similarly, the AIIB's maximum guaranteed amount is up to $125 million, and it will charge an annual guarantee fee of 50 basis points, a one-time processing fee of up to 50 basis points, and an upfront fee of 25 basis points.

The guarantees are designed in accordance with Chinese regulatory requirements and will be extended directly to bondholders, said the sources.

The AIIB and ADB have agreed to provide guarantees for the upcoming Panda bond issuance on the condition that the loan will be utilised for sustainable green projects.

Finance ministry officials said that transaction underwriters and financial advisors are already in place, while key third-party service providers, including Chinese legal counsel and a Chinese credit rating agency, have also been engaged. The issuance is targeted for completion before December 2025, subject to necessary internal and regulatory approvals in both countries, they added.

This inaugural issuance will be conducted through private placement on the interbank market to qualified institutional investors and will carry a fixed-rate coupon with a three-year tenor.

Due to comparatively lower yields in China, and with the backing of AAA-rated guarantees from multilateral lenders, the bond is expected to be issued at a relatively lower cost, according to finance ministry officials.

The government said this would result in substantial interest cost savings and contribute to a more sustainable debt profile. Government sources said the indicative pricing (coupon) of the bond is in the range of 3% to 4% annually.

Pakistan's non-debt creating foreign inflows remain below the country's overall suppressed external financing needs. Exports have not yet picked up despite numerous plans and foreign consultants engaged by the government. Exports remained stagnant at $5 billion during the first two months of the current fiscal year.