The overwhelming success of the issue with broad-based participation of diversified investor classes clearly establishes the transformative role our capital market can play in the economic development of the country. The SECP chairman further said that the SECP was in the process of further liberalizing the IPO regime with special focus on debt capital market. Sukuk was hugely oversubscribed by an amount of Rs139 billion (70 percent) and the cut-off spread determined for the instrument is six months KIBOR - 0.10 percent (minus).
This is the first time ever that the government has been able to borrow long-term on sub a KIBOR rate.
By raising funds in the said manner, the government has saved the cost of debt by 0.88 percent, in comparison to last issuance of PES-I at a cost of KIBOR plus 0.8 percent.
This has resulted in approximate saving of Rs17 billion over a period of 10 years on account of debt servicing cost.
This is the first time ever that book building mechanism for spread discovery of any debt instrument has been done through Pakistan's capital market.
Bidding process aimed at spread discovery in relation to six months KIBOR based on Reverse Dutch Auction method.
Initially, the process for issuance of PES-II focused only on investments from Islamic Banks and Islamic windows of conventional banks, limiting participation from other types of investors, and that too through a single bid.
This resulted in submission of bid by a consortium of banks at a rate of six months KIBOR+ 0.78 percent.
Visionary leadership of Finance Division, requiring financing arrangements to be competitive and transparent, led to re-tender of PES-II.
The Finance Ministry recognizing the importance of Pakistan's capital market, in funding infrastructure projects, took remarkable decision of utilizing capital market platform for issuance of PES-II Sukuk to diversified range of investors.
This transaction being unique and first of its kind was conceivable only because of concerted and untiring efforts of the Finance Ministry, Debt Office, Power Ministry, Power Holding (Private) Limited, the State Bank of Pakistan, capital market institutions i.e. the Securities and Exchange Commission of Pakistan; the Pakistan Stock Exchange; and Central Depository Company of Pakistan Limited and banking institutions, ie, the National Bank of Pakistan and Meezan Bank who offered their services on pro-bono basis.
This is a classic example of the institutions aligned towards achieving a common objective that is reducing Pakistan's cost of debt.
It will surely open up corridors for future debt issuances and pave way for further development of Pakistan's Debt Capital Market.
Decreased borrowing cost for the government is not the only benefit driving out of the breakthrough transaction but also increased outreach to multiple categories of investors other than banks.
Of the successful issue 13.3 percent has been subscribed by varied categories of investors that include mutual funds, development financial institution, insurance companies, provident and pension funds, and a retail investor.
The government's vision of running the whole process in a transparent and efficient manner, in terms of spread discovery and maximum outreach to the investors has been achieved.
In addition, this transaction has helped accomplishing the core purpose of alleviating liquidity crunch faced by energy sector via issuance of redeemable capital instruments through a competitive process.
Deep insight and vision of the Advisor to the PM on Finance and Secretary Finance towards making the process competitive and development of Pakistan's capital market has indeed been the driving force behind successful conclusion of this transaction.
Unlike the Sukuk issuance by PHL last year, investors who could participate in this issue included banks, financial institutions, companies or corporate bodies (as per Companies Act 2017), mutual funds, voluntary pension schemes, private funds being managed by the NBFC's, insurance companies, securities brokers, funds and trusts (as defined in the Employees Contributory funds), and individual investors having net assets of at least PKR 2 million.
By widening the scope of potential investors, the issuer benefits as it increases the likelihood of more accurate price discovery, while a larger group of investors will benefit from this investment opportunity. Given that it is a government backed security, such an issuance is generally considered risk free and provides stable returns in the long run.
After the security is listed, investors throughout Pakistan and abroad can buy or sell units of the Sukuk on the PSX BATS trading platform through their broker.
This will provide liquidity and investors will be able to buy or sell the Sukuk in line with their investment objectives.
In the long run, having a larger investor base will help the government to successfully raise funds from the market at the most competitive rates.
The book building process of Sukuk II of Power Holding Limited (PHL), a public sector entity fully owned by the Ministry of Energy, was successfully concluded Tuesday by Pakistan Stock Exchange.
The issue has attracted significant interest from investors and has been heavily oversubscribed, at very attractive rates for PHL. The private placement has attracted a diverse group of investors, including banks, NBFCs, mutual funds, insurance companies, pension funds and HNWIs.
This is the first ever debt issuance through book building in Pakistan Stock Exchange's history and represents an important milestone in the development of debt capital markets in Pakistan. PSX is now playing a key role in helping the government raise financing for infrastructure and the power sector circular debt, in the most transparent and efficient manner.
The debt instrument is being issued to address the liquidity constraints being faced by Pakistan's power sector. Pakistan Energy Sukuk-II (PES-II) is a Government of Pakistan guaranteed Shariah compliant security of Rs 200 billion which is 100 percent SLR eligible, having a 10-year maturity with semi-annual profit payment for investors. The book building process was held on May 18th to 19th 2020, with the bid(s) registration taking place between May 11th and May 15th 2020. PSX and the bookrunners, NBP and Taurus Securities, will present the results to the board of PHL before they are made public.
The Government of Pakistan decided to issue the debt through the Pakistan Stock Exchange to ensure transparency and competitive bidding. PSX offers a state of the art, book building mechanism which is used to determine the cut-off spread (-/+) in basis points (bps) over the 6 month Kibor rate, that the issuer will pay on semi-annual basis to successful investors. The total issue size is being offered through private placement to eligible investors, followed by a technical listing of the Sukuk on PSX.
With regard to this highly successful Sukuk II issuance at PSX, Farrukh H Khan, MD PSX stated, "This Sukuk issue, for the first time undertaken through book building in Pakistan, is a watershed moment for the development of the debt market in Pakistan. The book building process is used for price discovery and follows a standardized methodology in line with international best practices. This will increase the investor base, liquidity and secondary market trading of the Sukuk, enabling the GOP to borrow at the most competitive rates."
He further added, "We commend the Ministry of Finance and PHL for selecting Pakistan Stock Exchange to raise the Sukuk through a transparent book building process. The SECP greatly facilitated this process through their guidelines and proactive support. The Director General Debt was instrumental in understanding and streamlining the issuance of the Sukuk in this innovative new manner. We are also thankful to the SBP for their guidance and support. The PSX and book runners, NBP and Taurus Securities, did an admirable job considering the very tight timeline to undertake a very large, new issue. We are thankful to all of the above, and the investors, for making this issue a resounding success."
Unlike the Sukuk issuance by PHL last year, investors who could participate in this issue included Banks, Financial Institutions, Companies or Corporate Bodies (as per Companies Act 2017), Mutual Funds, Voluntary Pension Schemes, Private Funds being managed by NBFC's, Insurance companies, Securities Brokers, Funds and Trusts (as defined in the Employees Contributory funds), and Individual Investors having net assets of at least Rs 2 million. By widening the scope of potential investors, the issuer benefits as it increases the likelihood of more accurate price discovery, while a larger group of investors will benefit from this investment opportunity. Given that it is a Government backed security, such an issuance is generally considered risk free and provides stable returns in the long run.
After the security is listed, investors throughout Pakistan and abroad can buy or sell units of the Sukuk on the PSX BATS trading platform through their broker. This will provide liquidity and investors will be able to buy or sell the Sukuk in line with their investment objectives. In the long run, having a larger investor base will help the government to successfully raise funds from the market at the most competitive rates.