WAPDA Bonds

Once again become attractive investment

By SHABBIR H. KAZMI
July 19 - 25, 1999

In the current interest rate scenario, WAPDA Bond number 3 to 5 are perceived to be more secure investment in bond market due to the government guarantee provided to them. Bond 3 and 7 will be maturing in year 2000. Though, WAPDA has never defaulted on payment, it will be of some interest to explore how liquidity crunched WAPDA meets its obligation in the future. The question becomes more pertinent at the time when WAPDA needs approximately additional one billion dollar annually to keep its system updated.

WAPDA has, so far, floated six regular issues and one special issue involving total proceeds of Rs 23.7 billion. Starting from 1987-88, these bonds of varying maturity periods and carrying different coupon rates have been issued. Out of these, first two issues worth Rs 8.733 billion have already been redeemed. The remaining five bonds amounting to Rs 14.96 billion remain outstanding, the earliest maturing in the year 2000 and the last by the year 2004. The first 5 issues were government guaranteed and the remaining 2 were not. An amount of Rs 16.471 billion has been disbursed to bondholders till the last financial year. So far, there has not been any default by WAPDA on account of payments made for any of the issues.

WAPDA was established in 1959 for speeding up the development of country's water and power resources. Over the past 40 years, WAPDA has built and managed a number of water and power projects including two mega size hydel projects, Mangla and Tarbela dams, thermal power stations and several smaller hydel power projects. WAPDA is in constant need of funds for servicing and expanding its power generation and transmission capabilities. The main sources of funds besides sale proceeds from electricity are foreign aid and loans along with sale proceeds of WAPDA Bonds. The federal and provincial governments also provide grants and loans for specific projects and activities.

In the mid eighties, when the quantum of soft term loans from multilateral lenders reduced WAPDA was forced to float the Bonds carrying relatively much higher price. The shift in lenders policy was based on two factors: their assessment that WAPDA was not managing its financial resources in a prudent manner and funding of private sector power projects rather than financing state-owned utilities. The last Bond was issued in 1995. However, the need to float bonds was not felt mainly due to establishment of a number of IPPs and privatization of Kot Addu thermal power plant which reduced WAPDA's thirst for funds.

From investors' point of view, WAPDA Bonds are very attractive for the time being. The discount rate has fallen by a drastic 450 basis points in less than a year and FIB returns have fallen by another 3 to 4 per cent. At present, the 3rd issue appears to be the most attractive and highly demanded issue trading in the market. It is a government guaranteed issue with currently less than a year to maturity, a yield to maturity of approximately 18 per cent per annum and a market price of Rs 94/95. In a market where FIBs with four years to maturity are yielding a maximum of around 14 per cent per annum and the one-year T-Bills cut off rate has come down to 12.25 per cent, WAPDA Bonds currently represent an attractive investment opportunity.

However, from WAPDA's point of view these Bonds have been a tremendous financial burden. Though, it has been often said that IPPs are the cause of all the financial problems of WAPDA many sector analysts say that WAPDA Bonds, carrying such a high interest rate, are the main cause of its financial collapse. They also say that bulk of the liquidity of nationalized commercial banks was used for the financing of these Bonds which also deprived the private sector of its legitimate share in credit expansion.

Some analysts say that despite frequent and substantial increase in electricity tariff WAPDA has been constantly facing liquidity crunch due to above 35 per cent transmission and distribution losses and mounting receivables. Unless efforts are made to overcome these problems any fresh induction of fund will not bear results.

WAPDA BONDS

Issue Issue Maturity Tenure Coupon Amount

No.

Year

Year

Rate

(Rs. in billion)

Ist

1988

1998

5

13.5

3.102

2nd

1989

1994

5

13.5

5.631

3rd

1990

2000

10

12.5

6.844

4th

1992

2002

10

15.0

1.431

5th

1993

2003

10

16.0

1,250

6th

1994

2004

10

19.0

2.991

7th

1995

2000

5

16.5

2.450

Total 23.70

Source: KASB Money Market Desk