In 2003, interest rates were at historic low levels, thanks to liquidity-filled economy.
Since the returns on government securities were at low levels, relatively higher yielding corporate bonds received favourable response in the primary market.
Corporates also showed interest in issuing term finance certificates during the year, both listed and unlisted ones, in order to reap benefits of lower interest rates.
The TFC issue drive continued in calendar year 2003 but at a slower pace as compared to 2002. Direct low cost borrowing from banks and unlisted TFCs affected the pace of listed ones in 2003.
The number of listed TFCs issued in calendar year 2003 was 15 against 17 a year ago.
Firstly, there was increased focus on unlisted TFCs owing to relatively lenient regulatory requirements applicable on them.
The magnitude of unlisted TFCs in the economy can be judged from the fact that only PIA's unlisted TFCs worth Rs 15.4 billion are more than twice the amount of total listed TFCs issued in 2003. And, secondly, aggressive lending by financial institutions affected the TFC market.
An interesting issue in the outgoing year was that of Al-Zamin Leasing Modaraba. The return on this TFC will be determined on profit and loss sharing basis.
The company sold bonds worth Rs 300 million, including Rs 100 million to general pubic, exercising the green-shoe option.
This was something unique, as return on Term Finance Certificates is normally linked with SBP discount rate or cut-off yields of PIBs.
Listed corporate bonds worth Rs 6.2 billion came to the market in 2003. This amount was Rs 3.3 billion less than Rs 9.5 billion worth TFCs issued in 2002.
The difference in amount raised through Term Finance Certificates is more due to size difference rather than lesser number of issues.
The listed TFCs market is now worth Rs 31 billion (total outstanding issues), while only two years back it was around Rs 15 billion.
However, financial experts believe that actual size of the TFC market is understated, given the growing focus on unlisted TFCs.
Despite growth in corporate bond market in last few years, the size of TFC market in Pakistan is still minuscule as it is only 3.3 percent of market cap of share market. And, as a percentage of GDP, it is only 0.7 percent.
Listing of new TFC issues since June has dried up. Only 5 new issues were registered.
Weighted average lending rate in the banking system has reached 5 percent mark, while liquidity still prevails, thus companies are able to find loans at amazingly lower levels.
Due to this, experts see lesser activity in the primary corporate bond market going forward. The number of listed Term Finance Certificates may also dry up due to ease in raising funds via unlisted bonds.