Improvement in key economic indicators, higher return offered by Pakistan on its Eurobonds and foreign investors' investments helped the country to successfully launch its international bonds after a pause of seven years, which is trading on premium at overseas stock exchange, analysts said.
The five-year $500 million bonds were priced to yield 6.75 percent. The country cut the yield from an initial target of 6.875 percent after receiving orders of over $2 billion.
Despite limited exposure which most foreign investors have given to Pakistan, this was the perfect opportunity to increase their exposure in this area, especially in the light of positive news on Pakistan's economy, said Fauzan Abdullah, research analyst from KASB Equities.
This was evident in the break-up of the orders received, with European accounts picking up 54 percent of the issue, followed by Asian accounts who picked up 24 percent, Middle Eastern accounts 11 percent and offshore American accounts picking up 11 percent, since the issue was not available to onshore American accounts.
This was also apparent as the majority of the orders (76 percent) were received from banks and fund managers.
The yield on Pakistan's bonds is lower than on bonds of similar maturity sold by Brazil, which has a higher credit rating from Standard & Poor's. Brazil's 14.5 percent coupon bonds, maturing in 2009, yield 8.5 percent.
These bonds have a rating of B2 at Moody's Investors Service, level with Pakistan, and B at S&P, one level higher than Pakistan.
"But, we invested to diversify our investment strategy and the economic numbers are improving," said a foreign investor. He said that obviously there are risks, but there are risks in every emerging market.
"As compared to other countries with similar ratings, Pakistan got better price, thanks to small size and better marketing efforts," said Mohammad Sohail, head of research at Investcapital Securities.
It was interesting to note that in spite of nuclear proliferation issue, there was excellent response for the 5-year issue.
One of the leading foreign banks quoted that the bond was trading in the range of $100.70 to Rs 101.10, and the yield worked out to be 6.58 percent to 6.49 percent.
Thus, from the very beginning it is trading at a premium, signalling Pakistan's improved image in the eyes of foreign investors, Sohail said.
The previous $610 million bond, maturing in 2005, also got active and last quote received was $108.10, and the yield was 5.3 percent.
In real terms, the issue provides financing to Pakistan government at a rate similar to that which it can get from international lending agencies.
However, the effect it has is more indicative in nature. By utilising this avenue to raise finances, the government is basically indicating that it is no longer tied to any particular institution for financing purposes, rather it can meet its financing requirements from the market as well, based on its rapidly strengthening economic condition, at rates similar to those that are offered by the international financing agencies, Fauzan said.
At the same time, the government has been able to raise awareness about Pakistan and its much improved situation in the international finance markets.
Once again, in real terms there will be no immediate impact. However, it may positively affect market sentiment and may prove to be a catalyst which might propel the KSE-100 index beyond the magical 5000 figure.
In the medium term, however, the increased awareness of Pakistan's improved economic situation, caused by the hype around the bond issue, may serve to attract foreign funds to Pakistan's bourses thereby causing the index to rise further.
The bond was priced below expectations on the back of the huge volume of orders received as investors sought to increase their exposure to this side of the world.
"Over time, however, we expect the bond to trade nearer to 7 percent, especially with the announcement that the government plans to issue bonds on yearly basis. It may be noted here, however, that the issue has been priced at a premium of 370 basis points to the US 5-year Treasury bond, which is similar to the 350 basis points premium that a one notch better rated Turkish bond is trading at."
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