With a tenor of seven years, about 41.8 million PTCs were issued in the ratio of one PTC against one ordinary share held on the date of entitlement. PHOTO: FILE
Going by the instant feedback one received while sitting in a hall jam-packed with members and students of the Institute of Chartered Accountants of Pakistan (ICAP) at the ICAP CFO Awards ceremony last week, the presentation of AKD Securities CEO Farid Alam on Pakistan’s first-ever Participation Term Certificate (PTC) was tough to grasp even for many seasoned finance professionals.
After receiving the first prize at the third ICAP Excellence Awards for carrying out the novel transaction, Alam made a presentation on PTCs – a hybrid financial instrument with qualities of both debt and equity – which were first issued by the Treet Corporation in July 2012.
With a tenor of seven years, about 41.8 million PTCs were issued in the ratio of one PTC against one ordinary share held on the date of entitlement. The total size of the issue was Rs1.25 billion, as the face value of each certificate was Rs30. The purpose of the issue, according to Treet Corporation, was to repay existing bank borrowings amounting to Rs1.25 billion.
So what exactly is a PTC and how is it different from a typical term finance certificate in Pakistan?
“It is going to give investors an internal rate of return of 24-30%, which is matchless if compared with other long-term debt instruments,” Alam said, while speaking to The Express Tribune on Monday.
Through Renounceable Offer Letters (ROLs), existing shareholders were given the choice to have one PTC at the face value of Rs30 against each share they held. In case they did not want to acquire a PTC, they could sell their ROLs onwards like an unpaid right allotment letter. Alam said the ROLs sold for Re1 to Rs5 in the stock market.
The highlight of the PTC structure is that the holder of each PTC gets half a share in the Treet Corporation (signifying the equity portion of the financial instrument) in equal instalments over a tenor of seven years. Simultaneously, the principal redemption for Rs30 principal invested also takes place each year in the shape of Rs4.29 against each PTC.
Moreover, apart from this fixed return in the form of Treet Corporation’s shares, the investor also gets a variable return that is linked to the earnings of the company and predefined in terms of different earnings slabs. “This makes it a Riba-free, Islamic product,” says Alam. But it is not classified as such in official filings, because the sponsors did not initially conceive it as a Shariah-compliant financial instrument, Alam noted.
This was the first PTC issue in Pakistan, although the Companies Ordinance, 1984 specifically allows its use to raise money. “It took us one and a half years to come up with this product,” he said, referring to the difficulty his team had in convincing different stakeholders about the viability of a PTC issue.
As for the company, he said it managed to pay off a substantial portion of its debt by using the hybrid instrument. Tax benefits to the company due to the structure of the PTC practically meant its cost of borrowing remained considerably low in comparison to all other available options.
“Companies with a high tax rate can save on taxes if they issue such hybrid instruments,” Alam said, adding that AKD Securities will soon be carrying out two PTC transactions. One of them will be of Rs2.5 billion, which can possibly go up to Rs5 billion, he said, while the other one will be of Rs1 billion.
“The smaller transaction will be Shariah-compliant,” he said, adding that the other transaction can also possibly be officially called Islamic.
Published in The Express Tribune, March 23rd, 2013.
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