May 16 - 22, 2011

Pakistan is all set for issuance of exchangeable bonds of the state-owned Oil and Gas Development Company Limited (OGDCL) - the country's largest petroleum firm- in the international market in a bid to finance the soaring budget deficit. The country has already short-listed two consortia for the sale of bonds exchangeable into OGDCL shares, with the aim of raising more than $500 million.

A Pre-Qualification Committee (PQC), constituted by the PC Board, had selected two consortia. The first consortium, which also ranked on top, consists of Citibank, JP Morgan, Credit Suisse and BMA Capital. The second consortium consists of Barclays Bank, Standard Chartered Bank, Merrill Lynch/Bank of America and KASB. The Privatization Commission (PC) board has authorized a six-member committee to negotiate with the top-ranking consortium and inform the board about the outcome for proceeding further with the hiring process.

The country is gearing up for its second attempt to launch an offshore exchangeable bond, as it hopes to present a picture of improving credit with a current account surplus in the first nine months of fiscal year 2010-11. Analysts believe that the deal would mark the country's return to the international capital markets for the first time since 2007. The country was forced to shelve a similar deal in 2008 due to the global financial crisis, huge deficits and political instability.

The government wants to sell up to 10 per cent of its shares in OGDCL for budget financing in the current fiscal year 2010-11, as it expects to complete the transaction before June. The country's budget deficit for the first nine months of the 2010/11 fiscal year (July-June) was 4.5 per cent of gross domestic product (GDP), according to the Finance Ministry.

The PC board, which recently met under the chairmanship of newly-appointed Privatization Minister Ghous Bux Khan Mahar this week, formed the two negotiation committees for the appointment of the financial advisory consortia and issuer's legal counsel for the exchangeable bonds of OGDCL.

The PC Board has approved the issuance of OGDCL exchangeable bonds of $500 million The six-member committee, constituted by the PC board, will negotiate with the top ranking consortium for the appointment of the financial advisory consortia (FAC) for the issuance of OGDCL's exchangeable bonds by monetizing up to 10 percent of the government shareholding in OGDCL.

Listed on all three stock exchanges in Pakistan and also on the London Stock Exchange since December 2006, the OGDCL is the country's largest petroleum exploration and production (E&P) company. The company is the local market leader in terms of reserves, production and acreage. It owns 45 development and production/mining leases. It is engaged in exploring sedimentary basins including offshore areas of the country. During 2010, OGDCL operated 35 exploration blocks, including four offshore blocks. Its projects in the country include UCH-II project, Qadirpur Compression project, Dhakni Expansion project, Sinjhoro Development project, and Kunnar and Pasahki Deep/TAY Integrated development project.

The government has a 74.82 percent stake in OGDCL, and the bonds equate to 430 million OGDC shares if fully converted, or about 10 percent of the company's issued share capital. In 2003, the government divested 4.98 per cent of OGDC shares via an Initial Public Offering followed by secondary offering of 9.5 per cent shares in the form of Global Depositary Receipts (GDRs) at London Stock Exchange and simultaneous secondary public offering of 0.5 per cent to the general public in 2006. The government further divested its OGDC shares via Benazir Employee Stock Option Scheme where unit certificates equivalent to 10.2 per cent shares were distributed among the company employees free of cost for empowerment of the workers.

The PC Board had received requests for proposal of qualification from four consortia within the stipulated timeline who had submitted the expression of interest (EoI) for the appointment of financial advisory consortia for the issuance of oil & gas development company limited exchangeable bonds.

Floating of bonds would also help the government address the issue of inter-corporate circular debt in the power sector. OGDCL is the one of the most profitable public sector entities, which earned a profit of Rs 55 billion last year. The company has Rs 110 billion stuck in circular debt - recoverable from refineries and gas utility companies.

Cash-strapped Pakistani government is eying to raise a half billion dollar via exchangeable bonds of OGDCL for budget financing. Pakistan said in March it aimed to keep the budget deficit to less than 5.5 per cent of GDP for this fiscal year. The International Monetary Fund (IMF) and Pakistan have reportedly agreed to a target of 5.3 per cent of GDP, a target which the analysts believe is likely to be overshot.

In March, the PC Board approved roadmap for capital market transaction of various state-owned entities up to the end of current fiscal year in June. It also allowed the Privatization Commission to initiate process for hiring financial advisor to launch exchangeable bonds for the OGDC. The PC Board decided that a committee comprising officials of the ministries of finance and petroleum and the Privatization Commission would jointly administer the sale of international bonds for OGDC. The expression of interests had been invited from financial advisory consortia for the issuance of OGDCL exchangeable bonds. The transaction will be jointly led by at least two international book-runners who have recognized equity linked sales, distribution, and underwriting capabilities and demonstrable track record of successfully managing such issuances.

The government plans a major shift on privatization from the strategic sale to the public-private partnership to bring in professional, efficient management from the private sector for enhancing production, making value-addition to assets. The measure is expected to make national assets profitable creating more jobs through expansions in the public sector entities. The government plans to put Pakistan on the map of global capital markets. The roadmap for the capital market transactions include exchangeable bonds of OGDC and IPO of SLIC, Parco, Government Holdings Petroleum Limited, NIC, Fesco, Iesco - after approval by the CCI, secondary public offering of PPL, HBL and global depository receipts of Kapco, HBL and National Bank.

The government also plans to organize road-shows in Hong Kong, Singapore, Dubai, London and New York prior to undertaking these transactions. The PC Board also constituted a committee for formulating its recommendations under public-private partnership mode prior to initiating the process for Jamshoro Power Company.