The Islamic Republic of Pakistan sold a $1 billion five-year sukuk — or Islamic bond — on Wednesday, taking the asset class to its best levels since 2012 as investor familiarity improves.
The 144A/Reg S offering's final profit rate is 6.75% which is much tighter than its initial targeted profit rate of 6.875% area, a source familiar with the matter told FinanceAsia.
It was also issued via a special purpose vehicle fully owned by the government — The Second Pakistan International Sukuk Company — that was established specifically for issuing shariah-compliant securities in international markets.
"The government of Pakistan's sukuk offering reflects the growing interest in Islamic capital markets as a source of sovereign funding and helps support its domestic Islamic finance sector," Khalid Howladar, global head of Islamic finance at Moody's, said.
Pakistan’s Islamic bond — rated Caa1/B- by Moody’s and Standard & Poor’s, respectively — comes shortly after it completed a global investor roadshow that took in Dubai, Abu Dhabi, London and Singapore.
Based on an ijarah or leasing structure, the proceeds of the sukuk will be used for general budgetary purposes. The structure is an operating lease whereby the bank will buy and lease equipment or property by the customer for an agreed rental fee. The agreement does not include a promise that the leased asset at the end of the lease term will be transferred to the lessee.
Pakistan was last in the market in April when it completed a $2 billion dual-tranche offering split evenly between a five-year and 10-year bond issue.
According to Dealogic data, Islamic bond volumes have reached $19.4 billion in Asia ex-Japan year-to-date. This is 38% higher than last year’s volumes during the same period. In 2012, sukuk volumes touched $21 billion — an all-time high.
The last Asian sovereign to tap the sukuk market was the Hong Kong government, which sold an inaugural $1 billion five-year Islamic bond in September. Outside Asia, South Africa also launched a $500 million 5.75-year sukuk in September, while the UK sold a £200 million ($314 million) sukuk in June.
Reforms on the way
Pakistan's credit ratings capture its structurally large, albeit moderating, fiscal imbalances and weak debt metrics. The sovereign's 'Very Low' institutional strength assessment from Moody’s reflects implementation risks associated with economic reforms. It also factors in a high susceptibility to event risk, both on the political front and in terms of its economic vulnerabilities.
The country's foreign reserves rose sharply from $3.9 billion in January 2014 to $10.0 billion in July. However, muted export growth coupled with capital flow deterrents, such as delays in divestment and rumbling political uncertainties, resulted in a slight decline to $9.3 billion in September.
A sustained stabilisation in the external position hinges on the government's commitment to reforms under its programme with the International Monetary Fund.
Pakistan has made steady progress in meeting reform benchmarks under its current 36-month $6.8 billion Extended Fund Facility — funds offered to the sovereign under the condition that it carries out extensive economic reforms — which it signed with the IMF in September 2013.
So far Pakistan has cleared three programme reviews, most recently at the end of June, and has received $2.2 billion in financial assistance. Future milestones in the reform programme include changes to the tax system, energy reforms, and the privatisation of state-owned enterprises.
Possible comparables
There are no clear apples-to-apples comparisons for Pakistan’s sukuk. Bankers and investors were nonetheless able to get some general pointers from the secondary market ahead of the issue, where Pakistan's outstanding conventional 2019 notes yielded 6.296%, according to Bloomberg data.
In addition, the Export-Import Bank of Malaysia’s 2019 Islamic bonds yielded 2.392% while its 2019 conventional notes yielded 2.262%, suggesting a spread between sukuk and conventional paper of around 13 basis points.
Citi, Deutsche Bank, Dubai Islamic Bank and Standard Chartered were the joint bookrunners of the deal.
