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May 20, 2020

PSX completes book-building of Pakistan Energy Sukuk-II

Business

May 20, 2020

ISLAMABAD: Pakistan Stock Exchange (PSX) on Tuesday concluded book-building of much-awaited Pakistan Energy Sukuk-II worth Rs200 billion, issued to settle some of the gigantic power sector’s circular debts that have reached Rs1.6 trillion.

PSX said the issue attracted significant interest from investors and has been “heavily oversubscribed, at very attractive rates,” for the Power Holding Limited (PHL), a public sector entity owned by the ministry of energy. The private placement has attracted a diverse group of investors, including banks, nonbank financial companies, mutual funds, insurance companies, pension funds and individuals. The book building process was held on May 18 to 19, 2020, with the bids registration taking place between May 11 and May 15. PSX said it and book-runners – NBP and Taurus Securities – would present the results to the board of PHL before they are made public.

Officials said the issue was oversubscribed by Rs139 billion. A total 334 corporate entities, including 190 non-banking financial institutions participated in bidding, the official said. One unit of the sukuk was of Rs5,000, while the minimum bid size was 20 units, or Rs100,000. Bids were made in multiples of 20 units or Rs100,000.

“This sukuk issue, for the first time undertaken through book building in Pakistan, is a watershed moment for the development of the debt market in Pakistan,” Farrukh Khan, managing director of PSX said. “The book building process is used for price discovery and follows a standardised methodology in line with international best practices. This will increase the investor base, liquidity and secondary market trading of the sukuk, enabling the government to borrow at the most competitive rates.”

The good number of bidders helped in discovering a cut-off spread of 6-month Karachi interbank offered rate (Kibor) – 0.10 percent, which is 0.88 percent less compared to last issuance of PES-I at a cost of Kibor plus 0.8 percent. This has resulted in approximate saving of Rs17.6 billion over a period of 10 years on account of debt servicing cost. This is the first time ever that Book building mechanism for spread discovery of any debt instrument has been done through Pakistan’s capital market.

SECP Chairman Aamir Khan said the overwhelming subscription response to the sukuk at such a fine spread is a quantum leap for development of debt capital market. . This would prove to be first of many more public sector debt issues to be routed through the capital market, adopting a transparent process, he said.

The debt instrument is being issued to address the liquidity constraints being faced by the country’s power sector. Pakistan Energy Sukuk-II (PES-II) is a government-guaranteed shariah compliant security of Rs200 billion, which is 100 percent statutory liquidity ratio-eligible, having a 10-year maturity with semi-annual profit payment for investors.

PES-1 amounting to Rs200 billion was issued by way of private placement to Meezan Bank Limited-led consortium last year.

Unlike the sukuk issued last year, the latest issue allows investment from banks, financial institutions, companies or corporate bodies, mutual funds, voluntary pension schemes, private funds, insurance companies, securities brokers, funds and trusts, and individual investors having net assets of at least Rs2 million.

“By widening the scope of potential investors, the issuer benefits as it increases the likelihood of more accurate price discovery, while a larger group of investors will benefit from this investment opportunity,” PSX said. “In the long run, having a larger investor base will help the government to successfully raise funds from the market at the most competitive rates.”

Since it is a government-backed security, such an issuance is generally considered risk free and provides stable returns in the long run. After the security is listed, investors throughout Pakistan and abroad can buy or sell units of the sukuk on the PSX trading platform through their broker. This will provide liquidity and investors will be able to buy or sell the sukuk in line with their investment objectives.