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This makes the new bond comparable with similar instruments issued by the Jamaican and Kazakhstan governments

Dec 27, 1999 - Jan 02, 2000

Finally, the suspense regarding the fate of Pakistan's Eurobonds has ended. Acceptance of offer by more than 90 per cent bondholders puts an end to the speculation regarding the probable default on these instruments. While some analysts still regarded it as a high-risk instrument, many feel that risk is worth taking keeping in view the yield.

Earlier Standard & Poor (S&P) downgraded three of Pakistan's Eurobonds to 'D' (default) following the exchange offer made by the GoP in November. The exchange offer came at a time when three of the bilateral lender teams were due to arrive to complete the agreements required for the Paris Club US$ 3.3 billion rescheduling. Among the conditions imposed by these lenders was that the commercial debt undertaken by Pakistan should also be rescheduled. The exchange offer put Pakistan in a much stronger position to negotiate. The London Club rescheduling has already been undertaken.

The salient features of the new Bonds issued are:

* US dollar denominated, with first principal repayment due in 2002 and final maturity in 2005.

* Coupon Rate of 10 per cent

* Issue amount up to US$ 623 million aggregate principal amount of three prior issues times their conversion factors.

Will bear interest from the Exchange Date — December 13 1999 — payable semi-annually in arrears six months from the Exchange Date. The interest will be paid on amounts outstanding.

* The outstanding principal amount of each of the Notes will be repaid in four equal installments on the 6th, 8th, 10th and 12th Interest Payment Dates.

* The Notes will be a direct, unconditional and unsecured obligation of the GoP.

The existing Notes tendered were exchangeable by an amount equal to the product of US$ 1000 and US$ 1,032, US$ 1,057 and US$ 1,000 for the 11%, 6% and FR Notes respectively. Hence, the 11%, Notes worth US$ 1,000, will exchange for new Notes worth US$ 1,032.

While the exchange offer was declared completely voluntary, statements by the new government indicate that the old bondholders who do not take up the exchange offer will not be offered more favourable terms. Analysts say that holding on to the old bonds may involve holders in protracted negotiations, legal wrangling and the risk of outright default also exists.

The exchange offer got a boost with indications coming from S&P that they would rate the new Notes at 'B.' This would put the new issues in a comparable situation with Eurobonds issued by the Jamaican and Kazakhstan governments, which are yielding 10.842 and 12.77 percent respectively, and both trading at a marginal premium.

The problem with the new Notes arises when one considers the ability of the GoP to make the interest and principal payments. While the government's track record with respect to interest payments has been good, there is the worrying aspect that the servicing of foreign bilateral debt payments will almost double after December 2000. In addition to this, the terms of trade have deteriorated rapidly this year, due to high international oil prices and low cotton prices, which are well entrenched at their new equilibrium levels. This casts doubts on the ability of the GoP to honour its commercial debt obligations, even if they are relatively small compared to the bilateral debt repayments.

A clause in the memorandum is also worth noting. The clause states that the Notes are 'eligible' for future debt-to-equity conversion programmes approved by the Issuer. This hints that the government, should it not be able to meet future interest and principal payments on these Notes, may pursue the option of offering equity of public sector corporations. The GoP is facing difficulties in privatizing because of the lack of depth in the domestic capital market.

Analysts regard a 'B' rating by S&P to be optimistic, given the high internal and external indebtedness, the low prospects for economic growth in the next 2-3 years and the unwillingness of foreign investors to invest directly into the domestic market. The key issue is how the investors and manufacturers respond to recently announced economic revival package.

According to some analysts this instrument may be regarded as a high-risk instrument but the yield justifies it as such. Many bondholders also believes the same and have already expressed this by accepting the exchange offer.

The challenges before the current economic managers is to overcome precarious forex reserves situation, bridging the trade gap, and imposing the GST. At the same time it needs to seek further debt relief from foreign creditors. This hints towards the shape of the resolution of the IPPs issue, as any solution would require debt restructuring/relief.

The broad thrust of plan

* External account stability

* Revival of investor confidence

* Taxation

* Agriculture

* Information technology