The coupon of Pakistan's five-year $500 million Eurobond has been priced at 6.75 percent, raising questions about the need to obtain dollar funding from the bond market when the forex reserves are in excess of $12 billion and the $2.2 billion orders for the issue indicate pricing was the high side generating enthusiasm for the issue.
It appears that the critics have forgotten the rationale, put forth by the government in September last, that the exercise was meant to ascertain what the capital market thought of the state of our economy.
The issue size was to match the minimum requirement of the J.P. Morgan Emerging Market Bond Index and the aim was to create a benchmark for future Pakistani bond issues and not to raise more debt.
Further, the indicative price for the issue proposed in December last year cannot be taken as a bible quote.
What is relevant is the yield on comparable papers issued by emerging market countries which are rated at the same level as Pakistan's Eurobond of five-year tenure at the time of issuance.
In the past Pakistan raised $150 million from the Eurobond market in 1994, on five-year tenor paper at 11.5 percent coupon.
This was followed by a PTCL exchangeable bond of $160 million at six percent in February 1997 with a 'put' option in February 2000 and maturing in February 2002; and a $300 million three-year FRN issue at LIBOR +395 bp (Basis Point) in May 1997.
After the May 1998 nuclear test, the country was not able to meet its obligations on these debt issues and all the three papers were swapped at different rates and restructured in the year 2000 into a single issue of $620 million bearing interest at 10 percent with last instalment payable in December 2005.
Obviously, the market cannot be expected to forget the facts, but there are always risk takers who ignore the warning of the bewildering perils of investment in emerging markets.
On the one hand is Argentina which has been in default to the tune of $100 billion since late 2001, and on the other hand is Brazil where the return on investment made in October 2002 has been an intoxicating 124 percent by end 2003.
The Pakistan bond issue was rated B2 and B by the two credit agencies - Moody's and S&P, five notches below investment grade. At MS+335bp the issue maturing in 2009 compares well with Turkey at MS+374 09s and Philippine's 09 at MS-376bp.
This comparison is not exactly perfect as Turkey and Philippines already have the weight of heavy issuance under their belt and Pakistan has had no issue since 1997.
One would concede that cheaper money is available to Pakistan from other sources and offers at six percent are on the table for a five-year issue. But the debt strategy is not seek such debt.
This issue is primarily aimed to restore our link with the bond market and the additional cost for this, ie the difference between 6.75 and 6.0 percent comes to $21 million.
This small burden would, however, keep Pakistan on the radar of international research houses and the investor class and when we issue more paper of longer tenors across the yield curve, ie five, ten and thirty years, and create a benchmark, it would enable Pakistani companies seeking funds to invest abroad, such as buying an international brand in textiles to meet the competition after 2005, could float their own papers.
Obviously the market players would always try to assess the geo-political risk and the economic strength of the country whenever a paper is issued and the yields in the trade in the secondary market would always be a reflection of these factors.
At this moment, the nuclear proliferation issue and what happens when President Musharraf is not at the helm must be the two key factors in the assessment of country risk.
One cannot ignore that joining the US led fight against terrorism has helped to galvanise Pakistan's economic progress.
And the four key issues - Afghanistan, Kashmir, extremism and nuclear proliferation as repeatedly pointed by President Musharraf - hold the key to remaining on track for a real economic turnaround.
The placement of the Eurobond issue is indeed a good beginning to establish our connection with the international finance market.
The geographical distribution of the 215 applicants has indeed enabled Pakistan to be choosy and place half of the paper with investors who would buy and hold the issue, ie Funds and retail investors.
The rest in possession of banks and hedge funds can be expected to be sold to investors who have maintained historical links with this country.
As the issue size is small it would not be widely traded. We need to follow up with issues of different terms across the credit curve with new dealers in order to attract international investors in infrastructure projects and only then can we see a major breakthrough in industrial investment.
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