This makes the new bond comparable with similar instruments issued
by the Jamaican and Kazakhstan governments
By SHABBIR H. KAZMI
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
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 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$
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
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
The broad thrust of plan
* External account stability
* Revival of investor confidence
* Information technology