Political and economic instability have kept Pakistan out of the bond markets for the best part of the past decade. However, with the reform-minded Nawaz Sharif government instilling confidence in investors, Citi has helped to facilitate the country's return to the markets.

With almost weekly one-two punches from China and the US Federal Reserve, the post-summer holiday environment for emerging market bonds has been volatile. Yet when other emerging markets were pulling or delaying their own Eurobond sales, Pakistan was able to issue successfully. Citi, a regular in recent Pakistani issuance, was a joint bookrunner on its latest deal.

Pakistan has not always enjoyed such access. It was shut out of the international bond market for seven years after 2007, as its security situation deteriorated and the country's economy went with it. The 2013 election of the Pakistan Muslim League-Nawaz government under prime minister Nawaz Sharif was notable on at least two counts. It was the first time in Pakistan’s 66-year history that one civilian government was replaced by another, having served a full term without being ousted by the military or public protest. And second, Mr Sharif’s was a centre-right government committed to reforming the economy.

It was only the following year, on the back of renewed engagement with multilateral agencies and a focused economic reform agenda, that the sovereign was able to return to market with a $2bn issue. This was split into two tranches: a five-year bond paying 7.25% and a 10-year paying 8.25%. Pakistan’s previous 10-year international bond, sold back in 2007, paid 6.875%. Later in 2014 it priced a five-year, $1bn sukuk at 6.75%. “We have had a long relationship with Pakistan, and were joint bookrunners on both deals,” says Samad Sirohey, Citi’s head of central and eastern Europe, Middle East and Africa (CEEMEA) debt capital markets (DCM).

Lack of liquidity

The Pakistani government issued a tender for the latest deal in July, awarding mandates to Citi, Deutsche Bank (which had also worked on both 2014 transactions) and Standard Chartered (which was a lead on the sukuk). “The mandate was for a Reg S, Rule 144A US dollar bond, with reasonable flexibility in terms of tenor and size,” says Mr Sirohey. Given the market’s lack of liquidity, another $2bn was out of the question, but the size would be at least $500m, the benchmark for inclusion in appropriate indices. 

The bankers did not waste time. “We needed to update the documents for another year of events, but from tender to marketing was a very quick turnaround,” says Ignacio Temerlin, a director in Citi’s CEEMEA DCM team.

The market was choppy, to say the least. Growth in China continued to disappoint and Chinese equity markets were shedding much of the year’s extravagant gains. Every key economic indicator out of the US was scrutinised for clues as to whether the Fed would or wouldn’t raise interest rates. A Chinese slowdown meant less demand for emerging market natural resources, and a US rate hike was seen as bad for emerging market currencies and economies.

“We went on the road to engage with investors, and to present a transaction that was doable against this backdrop,” says Mr Sirohey. “There was always the option of not doing anything, but the story of positive credit momentum, macroeconomic achievement and reform helped to hold everything together.”

Pakistan is in the middle of a three-year Extended Fund Facility arrangement with the International Monetary Fund (IMF), whose latest review on the country, completed in August, was positive. It predicted that real gross domestic product growth would rise to 4.5% for the 2015-16 fiscal year (ending in June). This would be helped by macroeconomic stability, low oil prices and planned improvements in domestic energy supply, as well as investment in the China-Pakistan economic corridor. Foreign exchange reserves, it noted, had risen to $13.5bn at the end of June, covering three months of imports.

Hit the road

That view has not gone unchallenged. Critics argue that Pakistan's economic reforms are slow, that growth and budget deficit figures have been massaged for the IMF’s benefit and that the government’s insistence on maintaining a strong rupee was damaging the real economy. Nonetheless, Moody’s has upgraded Pakistan’s sovereign credit rating for the first time since 2008, from Caa1 to B3, citing IMF-related reforms and rising foreign exchange reserves. Fitch gives Pakistan a long-term foreign currency rating of B. Both ratings have a 'stable' outlook.

The roadshow concentrated on anticipated pockets of demand, meaning dedicated emerging market fund managers in London and on the east and west coasts of the US. Meetings were held in London, Los Angeles, Boston and New York.

“A lot of investors were keen to understand the China-Pakistan corridor,” says Mr Temerlin. “They were interested in the ratings upgrade and what the government had in store for the next year.” The outlook for Pakistan is generally positive, he adds, at a time when most emerging markets are having difficulty with their currencies because of lower commodity prices.

Concerns centred on the geopolitical environment, the security situation and how it was being managed, what was happening in Afghanistan and developments in the (dysfunctional) domestic power sector.

“The big names were happy to get an update,” says Mr Sirohey. “They were very positive on the credit but, with the current market backdrop, it was a question of what it would take to get a transaction done. The real conversation was around valuation.”

The Chinese effect

The roadshow took place between September 18 and 23 and the books were opened the following day. These were not exactly mill pond conditions. “Chinese purchasing managers' indices figures were down,” says Xixi Sun, a Citi DCM associate. “There was US rates uncertainty, the VIX volatility index was up and emerging market assets were suffering across the board.”

The previous week, the Federal Open Market Committee had actually left rates unchanged, which should have been good for emerging markets. But the accompanying statement cast doubt on Chinese and global growth prospects, which had the opposite effect. “We suffered in emerging markets by getting what we wished for,” says Mr Sirohey. “The reality is that if you go from zero to 0.25% not much happens, but you take the uncertainty out of the system.”

Early talk had been of a $1bn deal. On the eve of launch the decision was made to limit the deal size to $500m. “In a volatile market, investors want to participate in transactions with a better secondary market performance,” says Mr Sirohey. “If you are deploying new money, you don’t want the stock to trade down.”

The deal went out with a 10-year tenor and price guidance in the low eight percents. That was later firmed up at 8.25%, which was the same coupon as 2014’s 10-year offering, in rather worse conditions. The book attracted more than $900m of orders. “The 2014 bonds had traded well, and so people who passed on them last year came in this time,” says Mr Temerlin.

Fund managers win

The bonds subsequently traded up. The deal was the first emerging market non-investment grade sovereign issue since July. A full 87% of it went to fund managers, with most of the rest bought by banks and private banks. Geographically, as expected, there was an even split between the UK and US. They took 38% each, with 12% going to Europe and another 12% to Asia and the Middle East.

The transaction was all the more impressive given the number of emerging market issuers who have recently fallen by the wayside. They included Ghana, which delayed a $1bn, 15-year deal – it issued subsequently, but more expensively than anticipated. Angola put off plans for a debut $1.5bn international bond issue, choosing to wait for better market conditions.

“The market wasn’t ready for you just to pitch up on Monday morning,” says Mr Sirohey. “They are not falling over themselves to buy credit, so you must work with investors to find out their needs. That requires more careful management of dialogue to establish the needs of both parties and, to Pakistan’s credit, it listened to investors.”


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