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1- INFLATION UNDER CONTROL
2- PAKISTAN IS BECOMING A CHINESE SHOWROOM?
3- TFCS: SLOW PACE OF GROWTH
4- RE-STRUCTURING THE CBR
5- FUTURE DIRECTION OF EQUITIES MARKET
6- PAKISTAN AND E-READINESS

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TFCS: SLOW PACE OF GROWTH

 

The potential cannot be exploited due to non-supportive regulatory framework and absence of secondary market

 

By SHABBIR H. KAZMI
Aug 11 - 17, 2003
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According to a report by Capital One Securities, only three corporates have issued Term Finance Certificates (TFCs) during the April-June quarter of year 2003. These three issues totalled at one billion rupee. Whereas in January-March quarter, seven TFCs were offered. On a half yearly basis, the first half of 2003 registered 10 issues of Rs 3.6 billion as compared to 6 issues of Rs 2.61 million during the corresponding period of last year. The reservations regarding the future direction of interest rates was perhaps the major reason that delayed public offering of many issues in the pipeline.

The lack of interest is attributed mainly to declining trend of interest rates in the country. However, specifically after the 150 basis points cut in discount rates in November 2002 and the excessive liquidity available with the commercial banks forced them to adopt a more aggressive approach towards financing. This brought down the lending rates much to the benefits of companies planning expansions. As a result, the growth in TFC market particularly the instruments structured in the form of plain vanilla TFCs has slowed down. However, analysts believe that the opportunities for innovative debt instruments, particularly those backed by securitized receivables, enjoys enormous potential.

According to Iffat Zeehra Mankani, the interest rate pattern in the economy has brought a slight change in the TFCs that have been issued lately. As compared to TFC issued in the past that were offering coupon rates or yield to maturity equivalent to their floor rates, the recent ones considering the current SBP discount rate are offering higher yield to maturity than the floor rate. The recent examples can be that of Trust Leasing that despite offering a floor rate of 9% was structured in such a way that the yield to maturity, assuming the discount rate of 7.5% through out the holding period, comes out to 9.5%. Similarly the TFCs issued by Ittehad Chemicals offers 2.5% spread over and above the discount rate with a floor rate of 7%.

The problems of the secondary market remain the same that were at the beginning. The buyers' interest remains limited to investment in new issues that fail to satiate the existing demand. The secondary market has not developed due to limited activity. In the absence of regulations and OTC market, the listed debt instruments cannot be traded as compared to the potential.

One of the reasons for poor development of the secondary market is that bulk of all the TFCs issued so far has been raised through Pre-IPOs, mainly subscribed by the financial institutions. As these institutions are suffering from 'excessive liquidity syndrome' they prefer to retain the TFCs till maturity. Another factor responsible for low trading in TFCs is imposition of withholding tax. Even the retail investors prefer to retain the TFCs till maturity.

According to some analysts of fixed income securities, "The size of unlisted TFCs is triple the size of listed TFCs. A key factor responsible for the prevailing situation is high listing fees and 12-18 months time taken to complete the listing formalities. Therefore, it is most desirable that the local stock exchanges reduce the listing fees and curtail time spent of completing the listing formalities." Yet another impediment is that all the brokerage house are not allowed to handle TFCs trade, they have to seek special permission.

 

 

It is feared that if the irritant are not removed at the earliest the TFCs market may die its own death. The government does not seem to be interested in the development of secondary market for the debt instrument. While it may be heartening to note that Securities and Exchange Commission is playing a proactive role, it has not been able to address the issues adversely affecting the development of debt instrument market in the country. Globally the size of debt instruments is many times the size of listed equities. Whereas, it is the other way round in Pakistan.

TFCs issued during Jan-Jun period

Issuer

Issue

Tenor

IPO

Pre-IPO

Credit

 

Date

     

Rating

Security Leasing

09 Jan

4

60

239

A

KASB Leasing

15 Jan

5

40

160

A-

Gulistan Textile

30 Jan

5

80

320

A

Gulistan Spinning

30 Jan

5

80

320

A

Paramount Spinning

30 Jan

5

40

160

A+

Paramount Leasing

07 Feb

4

75

250

A

Securetel

27 Mar

3

200

640

A

Jahangir Siddiqui

18 Apr

5

100

400

AA

Trust Leasing

03 Jun

5

50

200

A

Ittehad Chemicals

27 Jun

5

50

200

A

Source: Capital One Securities