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
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.