Pakistan bond issue likely to be $750 million
HONG KONG: Pakistan is expected to sell a dual-tranche sovereign bond worth $750 million on Thursday, a smaller size than indicated earlier this week but one that analysts said should ensure a favourable reception in the market.
The deal, comprising 10-year and 30-year tranches, had generated $1.5 billion in orders and a total size of as much as $1.25 billion had been anticipated for what is Pakistan’s third foray into the international debt market since 2004.
However, market sources familiar with the deal said on Thursday that the 10-year tranche would be $500 million and the 30-year portion just $250 million.
The smaller size should ensure the bonds hold up in the secondary market, a big consideration for a government that may need to turn to international investors more as its economy develops.
One Hong Kong-based fund manager, who declined to be identified, said he was happy with the mooted issue size. “It’s a good size. At least they are trying to make the technical picture of this deal a little bit better. This deal should perform,” he said.
Pricing is expected during New York trading hours on Thursday. The sources said that the 10-year tranche was expected to be priced at around 7.125 percent, while the longer-dated tranche was expected to be sold at around 7.875 percent, the top end of the indicative yield range of 7.75 to 7.875 percent.
“I always thought the 10-year pricing was a bit tight. It’s about 25 basis points wider than Indonesia, but Indonesia is clearly going to be double-B category pretty soon,” said Dilip Parameswaran, head of Asian credit research at Calyon Corporate and Investment Bank.
Both Indonesia and Pakistan are rated B2/B-plus with a positive outlook, but last month Moody’s Investors Service placed Indonesia on review for a possible upgrade. Indonesia’s 2016 bonds were quoted on Thursday at 6.946/6.877 percent, while its 2035 bonds were at 7.476/7.419 percent.
Political risk, Market gyration: “While economically the country has done well, investors are still not totally comfortable with the political risks,” Parameswaran said of Pakistan.
“As long as President (Pervez) Musharraf is there, he will keep things moving. But after Musharraf, it’s not clear what system will take over and who will take over.” Parameswaran also said the timing of the Pakistan deal was unfortunate as U.S. Treasury bond prices — which emerging market debt is measured against — were choppy because of fluctuating views on where official U.S. interest rates might peak.
Tim Condon, head of Asian financial market research at ING, said demand seemed tame compared with the interest in deals from the Philippines and Indonesia earlier this year.
“The market is a bit unsettled,” he said. “The mood for that kind of risk is a bit cautious.” The Philippines’ $2.1 billion-equivalent, dual-tranche bond issue in January garnered $15 billion of orders, while a $2 billion, two-part issue from Indonesia earlier this month generated $8 billion of subscriptions.
Citigroup, Deutsche Bank and JPMorgan are joint bookrunners for the Pakistan bond issue. Pakistan, which had been under economic sanctions after conducting nuclear tests in mid-1998, returned to the international debt market in February 2004 with a $500 million, five-year eurobond issue. In January 2005 it sold a $600 million Islamic bond. Reuters