Political turmoil casts shadow over Pakistan bond

While Pakistan's financial story is a good one, the sovereign will face a tough battle reassuring investors for the country's fourth international debt offering since 2004.
Two roadshow teams are to be deployed to convince investors about PakistanÆs as yet unannounced sovereign dual-tranche bond issue. The first team will cover Singapore, Hong Kong and Los Angeles, while the second will cover Dubai, London, Boston and New York. They face the challenge of reassuring investors about the benchmark-sized offering, rated B-/B1, which is being managed by Citi, Deutsche Bank and HSBC.

When Pakistan's president, General Perez Musharraf, suspended the countryÆs chief justice Chaudhary two months ago, deadly clashes resulted in 39 deaths, and highlighted a fragile environment that could spin out of control, according to HSBC analysts in a May 14 global research report. ôShould the political situation unravel, the financial repercussions could spread to other emerging market sovereigns,ö wrote the analysts. The report recommends underweight on Pakistan, Indonesian, and Philippines sovereign credits.

However, deterioration on the ground has not affected Pakistan's financial assets, which have held steady. Rupee and dollar bonds remained level, while the equity market is up 23% year-to-date.

PakistanÆs financial credentials are strong. ôIn the perceived disorder, there is orderly progress,ö says one investor. Indeed, Pakistan has enjoyed a continuous economic growth rate, its highest ever foreign direct investment in the current fiscal year and a trickling down factor of economic growth helping to alleviate poverty and reduce debt.

Since the military coup that installed Musharraf as president, a sweeping reform programme of deregulation, liberalisation and privatisation has enabled the country to sustain an average growth rate of 7% over the past four years. As at December 31, 2006, foreign reserves stood at $14.86 billion, with the latest available figure (2005) on nominal GDP calculated at $110.7 billion.

Pakistan is the best value credit amongst Asian sovereigns, according to sources, and one of the few that provides pick-up over the rest of the high-yield space. Just last Friday, CDS issues from the Republic of the Philippines (ROP) and the Republic of Indonesia (ROI) broke new ground, according to HSBC data, with five-year CDS levels printing as tight as 100.5bp and 100bp respectively. Pakistan, on the other hand, is at 190bp over Libor û a 90bp differential.

Sources quote PakistanÆs 2016 and 2036 issues as comparables, which are currently trading at a price of 105bp and 108.5bp, as well as similarly-rated sovereigns such as ROP and ROI.

The transaction will be Pakistan's fourth international debt offering since 2004, when it made its first visit since economic sanctions were imposed for conducting nuclear tests in 1998. In February 2004, Pakistan priced a $500 million five-year fixed-rate deal under the lead management of ABN AMRO, Deutsche Bank and JPMorgan.

In January 2005, Pakistan returned to the international markets with a $600 million Reg-S Islamic Sukuk five-year FRN, under the lead management of Citigroup and HSBC.

The sovereign's 2016 and 2036 outstanding issues priced in March 2006, in a dual-tranche transaction upsized to $800 million. The deal, led by Citigroup, Deutsche Bank and JPMorgan, was split into a $500 million 10-year tranche and a $300 million 30-year tranche, representing the largest fundraising exercise yet for Pakistan.
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