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Many analysts term it very attractive in the prevailing circumstances

Nov 22 - 28, 1999 

Pakistan, after the takeover by General Pervez Musharraf, has been making strides to establish its credibility in the global financial market. While efforts were made to negotiate rescheduling of debts from multilateral lenders, commercial loans were also restructured. Eurobonds' next payment of US$ 150 million was due in December. However, on the insistence of the International Monetary Fund (IMF) and the World Bank, Pakistan has lately made an offer to restructure these bonds.

It has resulted in immediate down grading of Pakistan's rating by S&P. Many analysts term it very attractive in the prevailing circumstances. While it may ease, at least, some pressure on Pakistan's limited forex resources, it is supported by the IMF. International rating agencies are expected to re-rate Pakistan due to improvement in economic fundamentals of the country.

The down grading by S&P should not be a matter of concern. According to their laid down criteria, they are obliged to down grade the rating even if it is a technical default. Pakistan has made the offer for exchange of bonds much earlier than the maturity date and it has been supported by multilateral lenders. It is evident that the change in government has caused delays in disbursement of funds by the lenders. But the exchange offer was based on the revived strategy of the IMF which says that commercial debts should also be restructured when the Fund agrees for a restructuring of its debts.

The current economic managers of Pakistan were able to establish their credibility by collecting Rs eight (8) billion in cash through recovery drive. A total of, at least, double of this amount is expected by the year end as efforts continue. It is a positive sign in the efforts to strengthen the financial institutions of the country. The broad-based and transparent accountability is expected to further improve their financial health.

Finally, the suspense regarding the fate of Pakistan's Eurobonds has ended. An advertisement in newspaper by the GoP made the exchange offer for the following bonds:

1. US$ 150 million @ 11.5 per cent for Notes due in 1999

2. US$ 160 million @ 6 per cent for Exchangeable Notes due in 2002

3. US$ 300 million Floating Rate Notes due in 2000

This exchange offer puts an end to the speculation regarding the probable default on these instruments. The government is hoping for a very high participation rate, as there is no clear indication what the fate of non-participating bondholders will be. Details regarding the securities to be offered in return are sketchy, and it is also not clear how the valuation of the exchangeable will be carried out. However, it is important to note that the exchangeable note, which is exchangeable for Pakistan Telecommunication Company Limited (PTCL) shares at present, will not have any impact on the Company. Hence any price movement in reaction to this announcement should be a good opportunity to capitalize on.

Coming to the rather little details available, the instrument being offered is a six-year note offering 10 per cent return with four semi annual payments following a three-year grace period. The exchange offer expires in the first week of December. The current exchange offer more or less puts to an end intense speculation during recent months regarding whether Pakistan to default on its Eurobonds to firmly establish the principle of a similar treatment for creditors across the board, individual and institutions alike. As a result, default risk for Pakistan has kept investors (the brave) at bay. With at least the issue of Eurobonds out of the way, this risk should be abated slightly.