Pakistan eyes better terms for new Eurobond

KARACHI: The Pakistan Muslim League government will issue its third $500 million worth of Eurobond on better terms than the country’s previous forays into international capital markets, analyst said on Wednesday.
They expect the new bonds to be sold at much tighter spreads than four previous international issues due to improved macroeconomic fundamentals, upgraded credit ratings and stable economic outlook.
Finance Minister and his teams have already left for New York earlier this week to issue the bond, which will be priced on September 24. It is widely expected that the government will raise up to $1 billion against the target of $500 million. Citibank, Deutsche Bank and Standard Chartered Bank are underwriting the bond.
Analysts believe that Pakistan’s stable rating, strong foreign exchange reserves and credit default swaps fell from the 2013-level, and improved internal security is expected to push the government to get a lower rate and pricing.
They said the bond is likely to be oversubscribed many times giving significant interest of international investors in such government bonds.
The potential reclassification of the MSCI Pakistan Index from ‘Frontier Markets’ to ‘Emerging Markets’ likely in the first quarter of next year is also a good news for the issuers and investors as well.
“Yes economic risk to invest in Pakistan is improved, but this is the task of the financial advisors to make the issuer’s credit worthiness strong,” said Dr Salman Shah, former advisor to finance. “The spread on the Eurobonds could below six percent.”
Shah said the government and its financial advisors, both, have to ensure to the yield-hungry investors, fund managers and the analysts that the investment in the Pakistan sovereigns has now less risky.
Moody's Investors Service upgraded Pakistan's foreign currency issuer and senior unsecured bond ratings to B3 from Caa1, and

assigned a stable outlook on continued strengthening of the external payments position; and sustained progress in structural reforms under the government's program with the International Monetary Fund.
Though, the government is yet to decide the maturities of the Eurobonds, it is assumed that it would be of five-year and 10-year tenors.
Analysts estimate that the yields on the bonds may be between 6 and 7 percent. At present, the coupon rate at the March 2016 Eurobonds is 7.125 percent, yielding 7.0280 percent. For the maturity of June 2017, coupon rate is 6.875 percent with the yield of 6.6182 percent, while for the April 2024, the rate hovers at 8.25 percent, yielding 7.7786 percent.
“Given the growing interest of China in the country and improving economic prospects, Pakistan should aim for a more favourable pricing than the previous issues,” says Eman Khan from Tresmark, an application that tracks financial markets. “However, we're still not investment grade so there may only be a marginal decline in interest rates."
Pakistan raised financing of $2 billion comprising $1 billion each in 5 and 10 years Eurobond tenor with coupon rate of 7.25 percent and 8.25 percent respectively through the international bond transactions in 2013.
Dr Hafiz Pasha, former finance minister said the country can attract relatively lower pricing and pay the premium of 300-400 basis points over the US treasury rate on the new Eurobonds “in order to generate investor interest on account of improved perception about Pakistan.”
“In past, the government purchased an expensive debt, but now the improvement in macros will allow the country access to cheaper foreign resources for building country’s reserves,” Pasha said.
The foreign currency reserves of the State Bank of Pakistan climbed to $18.726 billion as of September 11, 2015 to lowest $12.98 billion in November 2014. Pakistan’s total debt stood at Rs18.972 trillion, or 69.3 percent, of gross domestic product in the last fiscal year 2014/15. —Erum Zaidi