Body formed to examine PC proposal: top international banks offer favourable view on OGDC convertible bonds

The Privatisation Commission (PC) has reportedly informed the Cabinet Committee on Privatisation (CCoP) that ten top international investment banks have provided a favourable view on the pricing of convertible bonds in Oil and Gas Development Company Limited (OGDC), official sources told Business Recorder.
The CCoP considered the proposal of the PC on February 3, 2011, but Finance Minister Dr Abdul Hafeez Shaikh did not clear the summary because of PC's work-load, and constituted a subcommittee. Official documents obtained from PC show that the Council of Common Interests (CCI) had approved privatisation of the oil and gas sector on May 29, 1997. The meeting also approved corporatisation of OGDC, restructuring of its different functions and divestment of the government stake.
Subsequently, the PC took the lead in various capital market transactions to divest government shareholding in OGDC. In this regard, a successful transaction was launched when a Global Depository Receipts (GDR) of OGDC was listed on London Stock Exchange (LSE) in December 2006, raising $880 million in the process by divesting 9.5 percent shareholding of OGDC.
According to documents, the PC has now proposed to return to international capital markets by issuing a Convertible Bond (CB) for oil and gas sector entities. An OGDC CB, ranging between $500 million to $1 billion, will serve as a pilot project. Pursuing CB is a contingent privatisation as the government of Pakistan's shareholding will be diluted if the bond is eventually converted into equity. The transaction will allow OGDC to raise efficient funding which can be utilised to fund future exploration projects and enhance the company's value.
On March 18, 2010, the PC Board approved the ideas of pursuing equity-linked instrument, in principle, and directed the PC to write to top 10 investment banks for submission of initial proposals for the instrument. Subsequently, the PC received initial proposals from top-tier global investment banks, including Citibank, Barclays Bank, Nomura Bank, Standard Chartered Bank, Deutsche Bank, J.P. Morgan, HSBC, Bank of America and Credit Suisse.
The banks have provided a favourable view on the pricing (the coupon rate is ranging from 4 per cent to 6 percent on average). Some banks have also demonstrated a commitment to underwrite the transaction prior to the official launch of the transaction. According to the PC, a successful transaction will enhance the profile of the government and OGDC and provide a favourable background for further issuance in the international capital markets.
It will also demonstrate Pakistan's capacity of raising funds from international markets and kick-start the process of privatisation by generating investor interest. The PC has quoted CitiBank saying that low global interest rate environment may be the critical factor as $3 yr swap rate is down to 1.30 percent in January from 1.66 in April 2010. Pakistan's credit spreads have returned to pre-crisis levels; 5 yr CDS is currently at 800 BPS vs 5104 BPS in October 2008.
According to the PC, benefits for OGDC are as follows: (i) low financing costs compared to straight debt instruments; (ii) attractive fixed income funding; (iii) sale of shares at a premium to the current price levels; (iv) diversify funding source; (v) voting and dividend rights on underlying shares retained by the issuer; (vi) positive signals on the company's share price going forward and; (vii) improve the float of the stock.
Upon conversion, OGDC will fix number of new shares to the CB investors, and GoP stakes will be reduced as result of more shares outstanding (ie GoP owns the same number of shares as before). Current non-GoP shareholders' stakes will be reduced.
The PC had proposed that a series of CBs will be issued for oil and gas sector entities, starting with the OGDC through consultation with line ministries and the concerned entities. It was also proposed that transaction size in excess of $250 million be subject to market conditions.
The subcommittee headed by the Federal Minister for Privatisation Waqar Ahmed Khan with members Minister for Petroleum and Natural Resources, Deputy Chairman of Planning Commission, Chairman of SECP, Secretary, Finance, Secretary, Privatisation, and Governor of State Bank would finalise the proposal soon to engage with capital market to submit its report to the committee soon for issuance of equity linked instrument ie convertible/exchangeable bonds of oil and gas sector including OGDC, in consultation with the line ministries.