Govt raises $1 billion through Sukuk bonds

The government decided to accept offers for a five-year tenure at a profit rate of 6.75 per cent

ISLAMABAD: In the second largest single transaction in less than a year, Pakistan on Wednesday raised $1 billion from international debt markets through the issuance of five-year dollar-denominated Sukuk bonds. The money will help build foreign currency reserves to the satisfaction of International Monetary Fund.

The transaction is expected to restore confidence of international investors, which had been shattered due to the unsuccessful attempt to sell shares in Oil and Gas Development Company Limited.

The government decided to accept offers of $1 billion for a 5-year tenure at a profit rate of 6.75 per cent, which is a half percentage point lower than the price at which the five-year Euro bond was sold in April 2014, announced the Ministry of Finance on Wednesday.

Unlike the Euro bond, which was issued without collateral, the government has pledged Islamabad-Lahore Motorway as collateral to raise funds. Sukuks are Islamic bonds which need to be backed by collateral.

The 6.75 per cent interest rate for $1 billion is 5.17 per cent over and above the benchmark five-year US Treasury rate.  Low interest rates in Western and European markets, amid fears of global slowdown of economies, have also increased interest in highly lucrative sovereign papers issued by developing economies.

The government was seeking to raise only US$500 million from the Euro bonds. However, the issue received significant interest from investors who over subscribed the bond to the tune of $2.3 billion, nearly five times of the target amount.

The Finance ministry had then decided to raise $1 billion through Sukuk to offset impacts of a failed OGDCL transaction. The successful transaction may revive the investors’ interest ahead of the Habib Bank Limited capital market transaction. The government is hoping to raise $1.2 billion by selling its remaining 42.5 per cent stakes in HBL.

The IMF has asked Pakistan to increase its official foreign currency reserves to $13 billion by June next year from the present level of $8.5 billion.

The geographical interest of investors was well distributed with 35 per cent subscriptions coming from Europe, 32 per cent from the Middle East, 20 per cent from North America and 13 per cent from Asia. The order book comprised of top quality investors from all parts of the globe, the Finance Ministry added.

Finance Minister Senator Ishaq Dar said that the success of transaction was a reflection of international investors community’s on economic policies of the government. He further stated that the profit rate of 6.75 per cent compares favorably with the average weighted cost of comparable domestic debt of about 11 per cent in Pakistan, and will save the country about Rs5 billion annually in debt servicing.