The Islamic Republic of Pakistan sold a $2 billion dual-tranche note on Wednesday, meeting with heavy demand as investors, particularly US investors, warmed to the country's improved political and economic outlook.
The deal, which is the Asian sovereign’s first dollar-denominated bond sale since 2007, is divided into five- and 10-year tranches of equal size, according to a term sheet seen by FinanceAsia. The bonds yield 7.25% and 8.25%, respectively.
Based on Dealogic data, the transaction is Pakistan’s largest international sovereign bond offering to date and the biggest debt issue by a high-yield emerging Asian sovereign since 2011, when the Republic of Indonesia -- then sub-investment grade -- sold a $2.5 billion 10-year bond.
Pakistan’s successful new bond offering – rated Caa1 by Moody’s and B- by Standard & Poor’s – comes at a time of economic and political transition for the country. The International Monetary Fund said in February that the Pakistan economy was showing signs of improvement, raising its economic growth forecast for the fiscal year ending June 30 to 3.1% from a previous estimate of 2.8%. It also said that its reform programme remained broadly on track.
“The country has its own set of issues including structural and economic issues, geopolitical tensions in that part of the region and terrorism,” a banker close to Pakistan's bond deal said. “But the new government that was elected in May last year committed to reforming the country and this boosts investors’ confidence.”
Nawaz Sharif was sworn in as the country’s prime minister for a record third time, winning almost half the seats in parliament. As a result, his Pakistan Muslim League-N party can govern without a major coalition partner and has a freer hand implementing its reformist agenda.
The last time Pakistan sold a dollar note was in May 2007, when it issued a $750 million 10-year note, Dealogic data shows.
Pakistan’s new dollar bonds drew an order book totaling around $7 billion, including a significant amount of US interest.
For the five-year tranche, US investors subscribed to 59% of the paper, followed by the UK with 19%, Europe with 10% and Asia with 10%, according to the term sheet. US investors also bought 61% of the 10-year bonds.
Fund managers accounted for 84% and 86% of the demand for Pakistan's five- and 10-year tranches, respectively.
Due to the strong investor interest, pricing tightened from the initial guidance of mid-7% for the five-year bond and mid-8% for the 10-year issue to 7.25% and 8.25%, respectively, sources close to the deal said.
Comparables
One of the closest comparables for Pakistan’s 10-year bond are the debut 10-year dollar notes issued earlier this week by Zambia, another so-called frontier investment market. Zambia’s notes (rated B+) were trading at around 8.2%-8.3% prior to Pakistan’s bond launch, indicating that the South Asian nation’s new notes priced flat to Zambia’s.
For Pakistan’s five-year tranche, bankers used the spread differential between Sri Lanka’s existing five- and 10-year notes, which was around 15bp at the time of pricing. Pakistan’s new 10-year notes had a G-spread of 550bp and after adjusting for the curve, the five-year tranche would come at a G-spread plus 535bp, said a source close to the deal.
Adding these spreads to current benchmark rates for five- and 10-year US Treasuries generates yields of 7% and 8.18%, respectively, for Pakistan’s five- and 10-year tranches.
Barclays, Bank of America Merrill Lynch, Citi and Deutsche Bank were the joint bookrunners of Pakistan’s sovereign bond.
Other south Asian issuance
Pakistan wasn't the only south Asian to come to market this week with dollar-denominated bond offerings.
Oil India made its debut in the international debt market with a $1 billion dual-tranche note. The transaction – equally split into five- and 10-year offerings with yields of 3.909% and 5.437%, respectively – is India's largest Reg S note and the biggest debut bond seen in Asia ex-Japan so far this year, according to Dealogic.
The crude oil and natural gas producer bond received a combined order book of more than $8 billion from more than 600 accounts. Citi, Deutsche Bank, HSBC, RBS and Standard Chartered were joint bookrunners on the transaction.
In addition, Sri Lanka raised $500 million on Monday with a five-year bond yielding 5.125% – the second time it has tapped international debt markets this year. The country plans to use the funds to build urban complexes and fund development projects, according to its 2014 budget documents.
Citi, HSBC and Standard Chartered were the joint lead managers and bookrunners on Sri Lanka’s deal, which was oversubscribed 8.3 times. The last time it tapped the international bond market was in January, when it issued a $1 billion five-year fixed-rate note.
