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ISLAMABAD: Finance Ministry has reportedly "accepted" conditions of State Bank of Pakistan (SBP) for issuance of offshore Pakistan Rupee (PKR)-linked Asian Development Bank (ADB) bonds worth $ 200 million to non-residents to be based on conducive market conditions, sources close to Secretary Finance told Business Recorder.

ADB yields can be in the range of -0.50 per cent to -2.00 per cent below the yield curve of domestic Pakistan government bonds. The sources said that Economic Coordination Committee (ECC) in its meeting held on July 15, 2020 granted, in principle, approval to the summary moved by the Finance Division for allowing ADB to launch offshore Pakistan Rupee (PKR)-linked bonds for non-resident investors with the directions to; (i) follow terms and conditions as suggested by State Bank of Pakistan for the proposed PKR-linked bond programme, and (ii) resubmit the case to the ECC for consideration, before the launch of the proposed programme.

Following the directions of the ECC, Finance Division consulted SBP and incorporated the terms and conditions proposed by the central bank in the draft permission letter, which would allow ADB to initiate the programme. However, SBP has further proposed that ADB may lend to priority sectors in Pakistan without restrictions of the minimum tenor, while previously it was mentioned that the minimum tenor would be of three years. Formal permission letter will be issued to ADB after proposal of the ECC.

SBP has summarized the following terms and conditions for ADB to issue PKR-linked bonds to international investors in the offshore market;(i) the programme will be restricted to maximum notional value of $ 200 million (equivalent) and with a minimum tenor of two years; (ii) PKR-linked bonds will be sold to non-resident investors only in the offshore markets; (iii) ADB will be allowed to buy or sell foreign exchange in the onshore FX spot market for the conversion of proceeds from the sale of ADB's offshore PKR-linked bonds, for the financing of ADB operations in Pakistan and for payments to bondholders of ADB's offshore PKR-linked bonds provided all foreign exchange transactions are entered into with an authorized dealer of Pakistan and backed by underlying transactions; (iv) the proceeds of any offshore PKR-linked bonds will be brought onshore by ADB, and shall be used for the purpose of project financing in priority sectors such as infrastructure, housing, renewable energy, health, education, agriculture, livestock, microfinance, banks and other financial institutions and other projects contemplated by the prevailing country partnership strategy or as otherwise agreed between ADB and the Government of Pakistan; (v) for liquidity management, ADB may open deposit/securities accounts in Pakistan. ADB may also buy/sell PKR-denominated government securities of all tenors. ADB may also buy or sell corporate securities issued by the priority sector and; (vi) in case Pakistan intends to revoke the approval, a six-month prior written notice to ADB of such a revocation would be required.

According to Finance Ministry, ADB was also requested to provide term-sheet/bonds prospectus for the programme. ADB has provided a copy of prospectus for ADB's Global Medium Term Note Program, which will be used to document any PKR-linked bonds issued by ADB in the international market. This is the main documentation architecture for ADB's international bond issues with $ 100 billion for debt securities outstanding.

With regard to pricing, ADB has anticipated to issue PKR-linked bonds at a yield below the yield curve of domestic Pakistan government bonds.

For indicative purposes, ADB yields can be in the range of -0.50 per cent to -2.00 per cent below the yield curve of domestic Pakistan government bonds.

Finance Ministry has sought approval of the ECC of the Cabinet for allowing ADB to issue offshore PKR-linked bonds.

Copyright Business Recorder, 2020