The bond offering comes at a time of heightened political instability in Pakistan following recent riots due to the removal of the country's chief justice, the Red Mosque siege, and attempts on President MusharrafÆs life.
These events have led Standard and PoorÆs to revise its outlook on the sovereign from positive to stable - a move which prompted PakistanÆs Ministry of Finance to write a letter to the credit rating agency, challenging the revision. The letter reportedly argued that the short-term nature of the political situation should not impact the outlook for the country, especially since the overall fundamentals show FDI and inwards remittances at their highest levels, illustrating a positive long-term trend.
Sources say that S&P's revision isn't really negative, but simply suggests that an upgrade is unlikely in the next six months. They say investors looking for exposure to Pakistan should recognise that the country's economic fundamentals are still positive and that occasional political flare-ups from single-B rated countries are not unexpected.
According to some sources, the Azgard Nine transaction will price soon after PakistanÆs Supreme Court ruling regarding its decision to bring charges against the countryÆs former chief justice. This is expected towards the end of the week.
Other sources in Pakistan say the company is waiting for the sovereignÆs 2017s bond to improve. These have widened over the last few weeks from 150bp to 250bp over swaps. Yesterday saw significant moves on the international bond market, with the iTraxx Crossover index widening out by 20bp-25bp, while credit default swaps for the Philippines and Indonesia increased by 10bp.
Investors contemplating buying Azgard Nine's bonds will be looking for double-digit compensation for a paper pricing in volatile market conditions from a country with national security concerns.
Despite AzgardÆs high degree of leverage (reportedly six times debt-to-Ebitda), the scarcity value of corporate Pakistani bonds is playing in the issuer's favour. The only option currently available to investors seeking this type of exposure is Pakistan Mobile which priced last year.
One investor that FinanceAsia spoke to said he felt more comfortable with corporate Pakistani paper than with sovereign bonds since political unrest is less likely to affect a private enterpriseÆs ability to service debt than it would the sovereign.
Some market observers have expressed doubt whether the deal will go ahead at all, but others believe the deal has come so far (in terms of obtaining a rating and winding up the roadshow), that Azgard Nine is unlikely to postpone its offering indefinitely.
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