Pakistan raises $1b through Sukuk bonds
In a second largest single transaction in less than a year, Pakistan has raised $1 billion from international debt markets through the issuance of five-year dollar-denominated Sukuk bonds. This will help Islamabad build foreign currency reserves to the satisfaction of the International Monetary Fund (IMF).
The transaction is expected to restore international investors’ confidence, which was shattered after an unsuccessful attempt to sell stakes in the Oil and Gas Development Company Limited (OGDCL).
The government decided to accept offers of $1 billion for a five-year tenor at a profit rate of 6.75%, which is half percentage points lower than the price at which the five-year Euro bond was sold in April 2014, the finance ministry said on Wednesday.
Unlike the Euro bond that was issued without collateral, the government has pledged the Islamabad-Lahore Motorway to raise funds that helped it keeping the interest rate below the Euro bond transaction when it raised $2 billion. Sukuk is Islamic bond that has to be backed by collateral.
The 6.75% interest rate for $1 billion is 5.17 % over and above the benchmark five-year US Treasury rate. Very 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 $500 million. However, investors showed a very high interest and made subscription of $2.3 billion, which was nearly five times of the target amount, said the ministry.
It decided to raise $1 billion to offset impacts of the failed OGDCL transaction on foreign currency reserves. The successful transaction may revive the investors’ interest in upcoming Habib Bank Limited capital market transaction. The government is hoping to raise $1.2 billion by selling its remaining 42.5% stakes in the HBL.
The IMF has asked Pakistan to increase its official foreign currency reserves to $13 billion by June next year from the present $8.5 billion.
The geographical interest of investors was well distributed with 35% subscriptions coming from Europe, 32% from the Middle East, 20% from North America and 13% from Asia. The order book comprised top quality investors from all parts of the globe, the finance ministry added.
Finance Minister Senator Ishaq Dar said the success of transaction was a reflection of confidence of the international investors’ community in Pakistan’s economic policies. He added that the profit rate of 6.75% compares favourably with the average weighted cost of comparable domestic debt of about 11% in Pakistan, and will save the country about Rs5 billion annually in debt servicing.
The proceeds of the Sukuk will go to the State Bank and the rupee proceeds of an equivalent amount will be used for retirement of domestic debt.
Published in The Express Tribune, November 27th, 2014.
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1719053250-0/BeFunky-collage-(5)1719053250-0-270x192.webp "non solar consumers bear rs200b burden")
@Gp65: I know that son... Im an economist, I know these things well.. My point is quantitative rather than qualitative. I could go through tons of auction mechanisms which would have done what I said at a cheaper rate (i.e. less than 6.25, nothing related to uncomparable sovereigns)
The fact that the issue was more than twice over subscribed means that the pricing was substantially higher than what they could have achieved with a more professional (and indeed sincere) team ! Anyway, there is a silver lining, that investors are considering Pakistan worthy of something but I have my doubts about the pricing achieved and the opportunity cost that we will be paying on that for next five years.
Compared to the prevailing global interest the rate on bonds is totally out of line and we should be ashamed for our government to have accepted it and beating their chest for it. Further should we be happy at every Pakistani being burdened by increasing indebtedness by the current government. Borrowing and at such high cost is a recipe for disaster.
It would be good to know who the actual purchasers of these bonds are ? If you have millions sitting in Swiss Banks earning next to nothing.......then 6.75% backed by the government makes good sense for the actual purchasers.
The 6.75% interest rate for $1 billion is 5.17 % over and above the benchmark five-year US Treasury rate. Very low interest rates in Western and European markets amid fears of global slowdown of economies have also increased interest in highly lucrative sovereign papers issued by developing economies.
look at the differential rate of 5.17%. the deal was oversubscribed. Govt should have revisited th pricing, and what to say about the swap arrangement, foreign funds shall be used to retire domestic debt and treasury will save 5B annually. surprised that depriciaiton factor in PKR has been taken into count while calculating savings. most probably not.
This is a great achievement of PMLN Government and Mr Dar as Finance Minister to raise funds in the uncertain market when US$ is bouncing back and LIBOR rates are set to rise significantly. The last time Pakistan raised funds through Sukuk was in 2005 when USD 500 Million was raised at 6.75% http://www.qern.org/en/record-sukuk-islamic-bond-offering-pakistan/ But the interest rates were on a decline in 2005 (continued to decline till 2007). On the other hand, USD 1,000 Million has been raised now at the same old price (despite increasing interest rates) is indeed an applaud-able achievement. Long Live Pakistan!
@just_someone: "Wow, that is a very high interest rate on the bonds."
Please note that Pakistan's sovereign credit rating is B- which is deep into junk bond vategory.. It would have to go up 6 grades to reach the minimum non-junk grade which is BBB- (B, B+, BB-, BB, BB+, BBB-)
High risk does require higher returns. Even this rate would have been impossible to get if it had not been for the underlying collateral.
Comparing gilt-edged US treasury bill yields to interest on Pakistani bonds has to be the height of hilarity !! Interest rates depend on the sovereign rating and Pakistan's rating is there for everyone to see. I think 6.75% is a bargain considering the state of Pakistan's economy. I would have expected it to be north of 10% pegged to the dollar - given the risks involved.
OK, so how exactly will foreign ownership of Isloo Lahore motorway work? Should I buy his bond so I can have piece of the motorway later?
The basic question on raising reserves on issuing sovereign securities is how are we supposed to pay them back along with the profit that is at such a high spread above US T-Bills rate? These proceeds add to reserves and our liabilities and are not being efficiently used in project that would generate earnings enough to pay these loans off. Further, exchange rate is a concern. If, in the upcoming years the rupee devalues, we'll have to may more than what we committed to pay. If the government is not able to use these funds efficiently, there is no use of bloating over the reserves as Mr. Dar is. I can understand his sentiments being an accountant myself.
After motor way what next. Raising capital at such a high dollar percentage is going to bite the nation when it comes to paying back. Offering a rate higher than market shows desperation of the the finance team. Sadly all these loan schemes will end up with the prime minister dining in London with his family and the nation fighting with each other for basic necessities of life.
How will they pay back?
Another feather in the cap for Shareef's Government.
Sold.
OMG! The rupee depreciates around 6-7% a year so you have to add that to the interest rate as well. He's being disingenous by ignoring that aspect.
I wonder what will happen in the event Pakistan defaults on this loan. Will the foreign investors take control over the motorway :)?
Our Pm and Fin. minister may say aby good thing about Pakistan economy. But it is in such shambles that govt had to raise money at 6.75% even after pledging security? Its 4 times more costly than normal international arbitrages are because no one trusts this govt. Will Imran khan talk about it on 30th ?
Is the Finance Minister comparing the cost of the (secured) dollar denominated bonds to local currency debt? Seriously???
It would be interesting to see how he would spin the fact that Pakistan ranks 4th in terms of the Top 10 most risky sovereign debt issuers as per S&P capitaliq... Worse than such bastions of peace and economic prosperity like Greece and Iraq...
Even junk bonds don't yield this much return nowadays, and this Sukuk issue was backed by collateral and sovereign guarantees. What an utter waste of Pakistan's already meager resources most likely to benefit the select.
Another good step by industrious Ishaq Dar.
Looks don't have any other choice to raise funds. It is going to be very costly, when these bonds mature.
Any body would invest at such a high interest rate (6.75%) with international interest outlook for govt. bonds not that good....
Its well above market rate that has attracted investors. I disagree with FM saying it shows investor confidence. He is not comparing apples with apples while comparing domestic rates and this rate.
Future government will pay higher price for their poor action....
He added that the profit rate of 6.75% compares favourably with the average weighted cost of comparable domestic debt of about 11% in Pakistan, and will save the country about Rs5 billion annually in debt servicing
Is our finance minister really that stupid?? How on earth can he compare 6.75% rate in US Dollar with 11% in Rupee? Has he taken into account the yearly depreciation rate of PKR against USD? The true rate will be around 20%, and how does he expect a broke country like Pakistan to repay the debt? We don't have export surplus from where we could generate extra USD.
" dollar-denominated " could make them very expensive in case of a further depreciation of the Pakistani rupee.
Wow, that is a very high interest rate on the bonds. The mechanism for the auction seems flawed... you would expect that they would have decreased the interest rate given the high demand (simple supply and demand) but they didnt have that in the ex-ante mechanism. We could have sold the original amount much cheaper!
Stop over exaggerating!! The investor confidence is at all time highs. Look at the KSE. Get a clue.
Well done