$1 billion Convertible Bonds termed ''hybrid'' instrument: PC''s proposal to support OGDCL

The Privatisation Commission''s proposal regarding issuance of upto $1 billion Convertible Bonds to support Oil and Gas Development Company Limited (OGDCL) has been termed as ''hybrid'' instrument and will create on debt to be served later.
Official documents reveal that the Cabinet Committee on Privatisation (CCoP) has recently been informed that the Privatisation Commission is now proposing to return to international capital markets by issuing a Convertible Bond for oil and gas sector entities. An OGDCL Convertible Bond, ranging between $500 million to $1 billion will serve as a pilot project.
Pursuing Convertible Bonds is a contingent privatisation, as Government of Pakistan''s shareholding will be diluted, if the bond is eventually converted into equity. The transaction will allow OGDCL to raise efficient funding which can be utilised to fund future exploration of projects and enhance the company''s value to GoP.
It was observed that funds raised through the convertible bond would be utilised by the company. It was further highlighted that since the government is in need of funds, exchangeable bond would be a preferred option. One view was that since it is a ''hybrid'' instrument and will create on debt to be serviced later, thus the proposal requires detailed analysis before the committee takes any decision. While discussing the nature of the convertible bonds, it was observed that risks involved should be analysed and it was suggested that the matter may be deliberated at a smaller forum, to make suitable recommendations, for the consideration of the committee.
The Privatisation Commission nevertheless stressed on the importance of equity linked instruments and informed that government can raise capital upto $1 billion in a very short time. According to the documents, it was also highlighted that there was an appetite in the market for Pakistan due to excess liquidity and favourable interest rates. Issuance of equity linked instruments at this time will give a positive signal to the international equity investors.
After detailed discussions on this thorny issue, the CCoP headed by Finance Minister Dr Abdul Hafeez Shaikh took the following decisions; (i) to give a positive signal to the international investors that GoP is already pursuing capital markets transactions and; (ii) to formulate a plan up to June 30, 2011 for State Owned Enterprises (SOEs) capital market listings and also furnish details of possibilities of domestic market offloading.
The CCoP also constituted a committee under the chairmanship of Minister for Privatisation and Deputy Chairman Planning Commission, Governor, State Bank of Pakistan, Chairman, Security Exchange Commission of Pakistan, Secretary Finance, Secretary, Petroleum and Secretary Privatisation as its members. The TORs of the committee are as follows; (i) the amount to be raised through equity linked bonds; (ii) selection of SOEs for equity linked bonds; (iii) time required to carry out the transaction; (iv) nature of the instruments and its pros, cons and risks; (iv) risk mitigation strategy; (v) prepare summarised term sheets for the convenience of the committee and; (v) questions relating to jurisdiction and institutional arrangements. The secretariat assistance to the committee will be provided by the Privatisation Commission.