LONDON, 7 February 2005 — Pakistan will not rush into issuing a series of Sukuk (Islamic bonds) but will use the instrument as a diversification tool for raising funds from the capital markets as and when needed, confirms Dr. Ishrat Husain, governor of the State Bank of Pakistan (the central bank).
This follows the launch of the debut sovereign global Sukuk issue of Pakistan in London on Jan. 18, 2005. The $600 million 5-year global Sukuk was priced at the tight end — 6-month $ Libor plus 220 basis points. The issue was joint lead managed by Citigroup and HSBC, who are also the joint book runners for the transaction. ABC Islamic Bank, Arab Bank, Dubai Islamic Bank, Habib Bank A.G. Zurich, and National Bank of Pakistan (OBU) acted as co-managers.
“We want to enter every year in the capital markets with different instruments,” stressed Dr. Husain to Arab News. “For 2005, we opted for an Islamic issuance because we want to broaden and diversify our investor base and also conventional bond holders are completely at ease with this Sukuk. In addition, the Islamic financial institutions and investors may also be interested in subscribing to the issue. We have plans to enter the capital markets with different products, instruments, currencies, tenor, and regulatory regimes. We may issue more Islamic papers, but this will be part of a diversified portfolio of issues. It is too early to say. Let us see how this Sukuk works out.”
A Pakistani delegation from the Ministry of Finance and State Bank of Pakistan led by Dr. Salman Shah, adviser to the prime minister on finance and revenue, and comprising Dr. Ishrat Husain, Mr. Nawid Ahsan, secretary Finance, and Dr. Ashfaque Hasan Khan, director general Debt Office, have been on extensive roadshows for the last two weeks for the transaction in Asia, Middle East and Europe.
The response to the issue was very positive, with investors putting in around $ 1.2 billion in orders, one of the largest order books for a Sukuk offering to date. The transaction appealed to both conventional as well as Islamic institutions, and attracted demand from both pools of liquidity in a wide geographic base. Pakistan was extremely encouraged by the quality of the order book, with central banks and government agencies accounting for 25 percent of the transaction; asset managers for 23 percent; Islamic institutions for 20 percent; conventional banks for 18 percent; private banks and retail intermediaries for 11 percent; and insurance companies and corporates about 2 percent. Geographically, the Middle East accounted for 47 percent of the issue; Asia accounted for 31 percent (of which Malaysia represented 16 percent); and Europe accounted for 22 percent.
Thus far, Malaysia ($600m); Qatar ($700m); Bahrain ($250m); Dubai ($1bn); and the Islamic Development Bank ($400m) have issued sovereign or quasi-sovereign debut issues. “We are very encouraged by the response to the issue,” explained Dr. Husain. “We are targeting the three regions — the Middle East, Asia, and Europe. Middle East investors know Pakistan very well. That was not our major preoccupation, although we would like Middle East investors to be very much part of this deal. We want to introduce Pakistan to Asian and European investors. In this way we are increasing awareness about the Sukuk as an asset class, and at the same time introducing Pakistan to these investors.”
In fact, the issue size was originally aimed at $500 million, but was increased given the strong response from the market in order to accommodate high quality investors who expressed interest in participating in the transaction.
This in spite of the fact that the issue was priced at the tight end of the margin. Pakistan, say bankers, was thus able to achieve an attractive cost of funding through this Sukuk issuance. The margin of $ Libor plus 220 basis points, compares favorably to the previous Pakistan Eurobond offering, which was priced at US Treasuries plus 370 basis points and which would have translated to $ Libor plus 330 basis points. This, they add, represents a reduction in cost of funding of over 100 bps on a comparative basis, and demonstrates the strong demand and appetite for Pakistan risk in the market. This new 5-year transaction has also achieved pricing at the same level as the secondary market trading spread on the 2009 Pakistan Eurobond (which has a maturity now of four years).
“Investors have been visibly impressed with the track record of reforms and the performance of the Pakistani economy over the past 5 years, and this transaction is a huge vote of confidence in Pakistan. This augurs very well for further investment in Pakistan by international investors,” stressed Dr. Salman Shah.
The proceeds from the Sukuk issuance, according to Dr. Husain, will be used “to pay back the expensive commercial debt and other noncommercial debt which is higher than the rate at which we are going to service this Sukuk bond.” In this way, the Sukuk will also set a benchmark for the corporate sector and for the domestic market also. “I hope this will also inspire Pakistani corporates to raise funds through Sukuk issuance, because it is a very attractive instrument,” he added.
The Sukuk Al-Ijara is a classic Islamic leasing arrangement. “We have our motorway between Islamabad and Karachi which has been transformed into Pakistan Sukuk Company, which is a special purpose vehicle (SPV). That motorway will be leased back to the government of Pakistan, who will make the lease payments to the Sukuk-holders and at the end of the five years they will redeem the principal amount also directly from the revenues of the government of Pakistan. This structure has been endorsed by the Shariah boards of HSBC and Citigroup and Meezan Bank, the three lead arrangers,” explained Dr. Husain.
The debut Pakistan global Sukuk has been assigned a B+ rating by Standard & Poor’s (S&P), the international rating agency. This is the same as the sovereign rating of Pakistan. The issue is a sovereign obligation, and the obligor is the government of Pakistan.
Dr. Ishrat Husain is not unduly concerned that the Sukuk market is dominated by one structure — the Sukuk Al-Ijara — and there is hardly any secondary trading of these issues. “The market is still in its infancy. We have had only five or six sovereign issues. Hopefully over the next few years other countries will also issue Sukuk. Thereafter, hopefully, there will be greater depth and diversification. Most of the Sukuk holders find the issues attractive and hold them to maturity. I hope when secondary trading takes off and liquidity is created in this market, there will be interest by investors for new issues,” he stressed.