HORDES of officials of the ministry of finance, Planning Commission, Privatisation Commission, Oil and Gas company and financial advisors are trotting the globe in search of investors who would subscribe to the government’s offer of $500 worth OGDC bonds exchangeable into shares.
That the investors in the world’s finest markets would be willing to offer cash for bonds that are backed by 10 per cent shares of the Pakistan’s biggest oil and and gas exploration company—put on the platter at attractive yields—is a distinct possibility.
But if the cash-starved government is anxiously awaiting the bagful of dollars before the end of current financial year (three days remaining to June 30) in a bid to maintain the fiscal deficit at 5.3 per cent of GDP as agreed with the IMF—that dream is likely to turn sour.
The government has targeted investment savvy markets of Singapore, Hong Kong, Abu Dhabi, Zurich, London and New York.
Financial Advisory Consortium comprises four foreign and one local firm: The Citigroup; Credit Suisse; JP Morgan and BMA Capital. Hamad Aslam, head of Equities at BMA Capital was confident that the bonds would generate the targeted amount of $500 million.
“There are several reasons for optimism”, he said and counted some of them: the bonds are dollar-denominated, offering indicative interest rates between 5-7 per cent, which makes them highly attractive against other instruments in international markets that give out comparatively insignificant yields. The bond holders would also have the ‘option’ of convertibility of bonds into shares after three years.
If at the date of maturity, the OGDC stock is trading at discount to the “strike price”, the bond holder could exercise option of either converting bonds to shares or redeem his capital. Moreover, the OGDC bonds are not laid on the auction table but the marketing teams and advisors are in negotiations with potentially interested investors and are trying to seal a deal onparty-to-party basis.
Already identified potentially interested hedge fund managers in different countries are being convinced to place part of their ‘Frontier Market’ allocated amount in OGDC’s equity-linked convertible bonds, said Hamad.
It is a matter of marketing not just the bonds, but to convince foreigners of the investment opportunities that Pakistan presents.
One attractive feature that OGDC announced this week was that the bond would be traded on the Singapore Stock Exchange.
An analyst familiar with the matter said that most foreign investors were wary of riskier markets. “Risk premiums on corporate bonds have risen to their highest level this year amid continued jitters about Greek default and slowing economic growth”, he said and added that terrified investors had pushed Greek two-year bond yield above 30 per cent for the first time.
In regard to Pakistan’s OGDC bonds, the foreign hedge fund manager would surely weigh country risk against returns.
But not every economist was on the same page, as the optimists. A detractor scoffed at the idea of selling 10 per cent shares (out of the 75 per cent that the government holds) in country’s largest O&G company (producing crude oil at 39,075 bbl/day and gas at 976 mmcf/day) through exchangeable bonds in international markets, in a bid to help shrink budget deficit.
He claimed that such an act of securitisation of the country’s strategic holdings in worthy assets,was a violation of the fiscal responsibility Act 2005 as well as the Privatisation Law, which required almost the entire proceeds from sale of state-owned assets to be utilised for payment of debts.
“Selling of precious national assets to pay off short-term liabilities would diminish the country’s future ability to repay loans”, he said, adding that OGDC itself was entangled in the maze of circular debts that was affecting its liquidity.
“While the company needs financial support, it is instead being drained of more blood” said this man. Last year, OGDC had, for the first time in its history, skipped a dividend with the quarterly results due to cash constraints. Privatisation Commission officials in Islamabad declined to comment. Another economist thought that that the attempt to sell bonds would fizzle out just as commitments of money in aid by “Friends of Pakistan” never fully materialised.
This week’s decision by the world’s respected market indices tracker—MSCI Barra not to upgrade Pakistan from “Frontier” to “Emerging” markets for 2012 and the dip in volume of daily trades at KSE would be further dampeners. If the global fund managers do cough up the cash, all that the $500 OGDC bonds would generate would amount to around Rs 5 billion in rupee terms.
“The sum would disappear in the black hole of nearly a trillion rupees in fiscal deficit”, said the critic.
The government’s anxiety is to keep fiscal deficit at IMF directed 5.3 per cent of GDP as one key element in restoration of $11.3 billion SBA programme which has been suspended for the last 15 months. “The restoration would mean that the country would get the next tranche of $1.3 billion”, said an analyst.
Another person conversant with the issue argued that the government should have thought of putting up the bonds on offer two years ago, when global markets had the appetite for international issues. “Many countries such as Sri Lanka and China had seized the opportunity and benefited by making numerous such offers at the time”, he said.
Source: Dawn News
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