It is not an appropriate time for Pakistan to issue US$ denominated Eurobonds

There are reports that Pakistan is getting ready to issue US$ denominated Eurobonds of more than US$2 billion over the next few days. The settlement date for the issue is likely to be 6th April 2021. However, some analysts are of the view that it is not an appropriate time to go for this adventure.

Initial indications suggest that 5-year bond’s bids to be between 6.0-6.5%, 10-year bond’s between 7.2-7.7%. Interestingly, Pakistan is also trying to sell Eurobonds having a tenor of 30 years at a yield of close to 8.5-9.0%.

They say, currently US$ exchange parity is on the slide and further erosion in value is anticipated as Ramadan gets closer. They anticipate an influx of more than US$2.5 billion over the next 30 days, which may push the parity below Rs148.

They go to the extent of saying that Pakistan should capitalize this opportunity, as no interest payment will be required. The want State Bank of Pakistan (SBP) to work out a band, in which parity should be allowed to move. The central bank should start buying when parity goes below the threshold point or start selling which parity crosses upper limit.

They believe the central bank has ample supply of local currency in its coffer and in the worst scenario can print more. In this scenario the biggest collateral will of the added foreign exchange reserves.

Currently, Pakistan’s US$ denominated bond yields around 5.9% (having maturity in 2027) in the secondary market. The average yield over the last 3-months for the same is around 5.8%.

We believe this re-entry of Pakistan in international capital markets will support investors’ sentiments. Regardless of the yield, the size of these bonds will provide much needed support to Pakistan foreign exchange reserves that are currently adequate for 3 months of import only.

S&P and Moody’s presently rate Pakistan as B- with stable outlook and B3 with stable outlook.

Recently Egypt having S&P rating of B and Moody’s rating of B2 (one notch above Pakistan), raised US$3.75 billion. Egypt sold 5-year worth US$750 million at 3.875%, 10-year bonds worth at US$1.5 billion at 5.875% and 40-year bonds worth US$1.5 billion at 7.5%.

Pakistan Rupee (PKR) vis-à-vis US$ has climbed to a 22-month high, gaining around 3% during the last month and 9% from its bottom touched on 20th July 2020.

Pakistan floated its first bond in international market during 1994 and then in 1997.

The first bond was launched on Dec 22, 1994 at 11.5% with amount raised being US$150 million. This was followed by US$160 million and US$300 million bond in Feb-May, 1997 at 6% and Libor + 395bps, respectively.

Later due to international restriction after nuclear testing Pakistan was unable to tap international market. However, Pakistan reverted back to international market in 2004 as better macroeconomic indicators resulted in improved ratings.

In FY05, Pakistan issued 5-year Eurobond and raised US$500 million at rate of 6.75%.

In FY06, Pakistan issued US$600mn in 5-year Sukuk issuance at rental rate of 6M LIBOR plus 220bps.

In FY07, Pakistan issued total US$800 million by issuing two Eurobonds of worth US$500 million (7.125%, 10 year) and US$300 million (7.875%, 30 year) each.

After gap of 7 years, Pakistan mobilized US$2 billion in April 2014 by issuing 5 and 10 year bonds at 7.25% and 8.25%, respectively.

In November 2014, Pakistan issued Sukuk of US$1 billion (already matured in December 2019) at 6.75%.

In September 2015, Pakistan issued 5-year Eurobond of US$500 million at 8.25%. In Oct-2016, Pakistan issued 5 year Sukuk of US$1 billion at a lowest rate of 5.5%.

In last issue of November 2017, Pakistan raised US$2.5 billion by offering 5-year Sukuk of US$1 billion and 10-year Eurobond of US$1.5 billion at 5.625% and 6.875%, respectively.