Finally, the relentless Privatisation Commission (PC) officials have managed to persuade their hesitant fellows in the Finance ministry.
Earlier this week, PC signed a financial advisory services agreement for the offshore sale of the Oil & Gas Development Company Limiteds (OGDCL) exchangeable bonds with a consortium of Citibank, Credit Suisse, JP Morgan and BMA Capital.
These are crunch times for the government which has looked left, right and centre for budgetary support. What could be better than a debt arrangement which gets them valuable foreign exchange too.
The government has a majority shareholding of 74.8 percent in OGDCL, a company having clear market leadership in terms of oil and gas reserves, producing assets and exploration coverage in Pakistan.
It has been reported that the PC is looking to raise more than $500 million through monetising up to 10 percent of government shareholding (up to 430 million shares) in OGDCL through this transaction by the end of current fiscal year.
The exchangeable bonds will be issued and securitised by the government. OGDCL shares will be offered as the underlying security and investors will have the option to buy OGDCLs stock in future.
Hamad Aslam, head of Equities at BMA Capital told BR Research that the consortium is currently working on the transactions offering document.
According to Aslam, the maturity of the bonds could be between three to five years. The coupon rate would be dollar-based and fixed at 5 or 6 percent. Three to four years down the road, bondholders can exercise the uy option to exchange bonds with OGDCLs stocks at a strike price determined at the time of transaction.
The strike price would be set at a 15 to 20 percent premium to OGDCLs share price on the date of bond issuance.
If this deal comes through, it will mark Pakistans return to international capital markets for the first time since June 2007 when Global Depository Receipts (GDRs) of UBL were issued to international institutions and investors.
OGDCL has gone international before, when $738 million were raised through flotation of GDRs worth 9.5 percent of government shareholding on the London Stock Exchange in December 2006.
The high profile consortium handling the OGDCL bond issue will have their hands full if the transaction is to be completed before June 30, 2011 - the deadline set forth in the agreement between the consortium and the Commission.
Besides working out an attractive deal, they will also have to undertake aggressive marketing such as conducting road shows and teleconferencing, for international investors.
Some experts believe that timing of the bond issue is not right because Pakistans risk premium in international capital markets is currently running high due to various reasons. At a time when interest rates and yields are declining in international markets, yield on Pakistans Eurobonds has gone up, currently over 10 percent.
On this, Aslam said that the OGDCLs exchangeable bond would have lower yield because it offers interest bearing coupons as well as the uy option, compared to Pakistans Eurobonds, which only offer plain vanilla interest.
Given a choice, investors would likely opt for exchangeable bonds instead of Eurobonds because the former offer potential investors exposure in the lucrative oil and gas sector of Pakistan.
However, given the fact that the consortium still has a long way to go before completing this transaction, the deadline of June 30, 2011 seems a bit optimistic.