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  • Nov 3rd, 2017
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The Ministry of Finance has sought the federal Cabinet''''s nod to float international sovereign Sukuk against the underlying asset of unencumbered portions of Motorway and international sovereign bonds 2017 during the current month in the international capital markets of around $ 2-3 billion aimed at strengthening foreign exchange reserves and stabilizing the balance of payments, well-informed sources in the Finance Ministry told Business Recorder.

Financial Advisors of previous transactions are indicating favourable market conditions for issuance of sovereign Sukuk/Bond which may potentially receive good response from international investors at a good price in view of liquidity conditions of international capital markets. Recently, countries like Belarus, Iraq, Tajikistan and Bahrain have successfully executed capital market transactions.

Recent sovereign issuances show that Belarus whose rating according to S&P was B- raised $ 800 million through bonds in June 2017 for five years at a coupon of 6.875 per cent and $ 600 million for ten years at 7.625 per cent coupon. In August 2017, Iraq whose rating was also B- (S&P) raised $ 1 billion through five year bonds at 6.75 per cent coupon.

In September 2017 Tajikistan whose rating according to Moody''''s and S&P was B 3 and B respectively raised $ 500 million against 10 year bonds at 7.125 per cent coupon. Bahrain whose rating according to Moody''''s was B 1 also raised $ 3 billion from international capital market in September 2017 of which the tenor of Sukuk amounting to $ 850 million was 7.5 years at 5.25 per cent coupon, $ 1.259 billion from bonds for 12 years at 6.75 per cent and bonds of $ 900 million for 30 years at 7.5 per cent coupon.

According to sources, in view of favourable market conditions and keeping in view urgent requirements of the country, Finance Division invited technical and financial proposals from national and international banks through advertisement in national and international newspapers. In response, nine proposals for Sukuk and six proposals for bonds were received.

The banks which submitted Sukuk 2017 proposals are as follows: (i) Standard Chartered Bank;(ii) Industrial and Commercial Bank of China ;(iii) Citibank ; (iv) Deutsche Bank ;(v) Dubai Islamic Bank ;(vi) Noor Bank;(vii) Emirates NBD;(viii) First Abu Dhabi Bank; and (ix) Bank Alfalah. The banks which submitted proposals for Bonds 2017 are as follows: (i) Standard Chartered Bank ;(ii) Industrial and Commercial Bank of China ;(iii) Citibank ;(iv) Deutsche Bank;(v) Emirates NBD; and ( vi) First Abu Dhabi Bank.

The technical and financial proposals of banks were evaluated by a committee comprising officials of Ministry of Finance and the State Bank of Pakistan (SBP).

Based on recommendations of the evaluation committee, the following consortium of banks is proposed to be appointed as joint lead manager to prepare necessary documentation and execute the transactions: For Sukuk 2017- (i) Deutsche Bank;(ii) Dubai Islamic Bank;(iii) Industrial and Commercial Bank of China;(iv) Noor Bank ;(v) Citibank and ;(vi) Standard Chartered Bank.

For Bonds 2017, (i) Deutsche Bank, (ii) Industrial and Commercial Bank of China; (iii) Noor Bank; (iv) Citibank; and Standard Chartered Bank have been appointed lead managers.

The sources said, for the proposed Sukuk transaction, a Special Purpose Vehicle (SPV), the Fourth Pakistan International Sukuk Company Limited is being incorporated by the Finance Division. The essential structure of Sukuk issue involves sale, purchase and transfer of assets from one entity to another which result in imposition of various federal and provincial duties and taxes, making the overall cost of a Sukuk issue relatively expensive from regular international bond issue. Some of these taxes relate to the income of non-resident Sukuk holders as well. If these taxes are not exempted, the transaction cost makes a Sukuk issue undesirable for international investors resulting in high pricing for the country.

The proposed consortium of banks is initially indicating multiple tranche issuances of a five year Sukuk, a ten year Bond and a thirty year Bond with combined proceeds of around $ 2-3 billion. The exact issuance size will however be determined on the basis of market appetite and pricing.

Finance Division has proposed road shows for both issuances in the UK, USA, Dubai and Singapore/ Hong Kong. The launch date is expected to be in the second half of November 2017. However, final launch date will be subject to the market conditions and advise of the joint lead manager.

The sources said, Finance Division has sought cabinet approval for the following proposals: (i) approval under Rule 16(1)(d) of the Rules of Business, 1973 to allow the Finance division to issue international sovereign Sukuk and international sovereign Bonds in the international markets ;(ii) allow the federal government to grant exemption under the provisions of the Income Ordinance, 2001 including sections 46,113,147, 150A, 152, 153, 231A, 231AA and 236 K, and section 75 of the Second Schedule of the Ordinance; and (iii) allow the federal government to grant exemption from the applicability of Capital Value Tax under section 7 of the Finance Act, 1989.

Finance Division, in its summary of November 2, 2017 has sought approval of federal cabinet through circulation of summary instead of regular cabinet which was held on November 1, 2017. Interestingly, an Additional Secretary Prime Minister''''s Office, Naveed Alauddin advised Finance Division on November 1, 2017 to place the summary before the cabinet for its approval in terms of Rules 17(1)(b) of the Rules of Business 1973.



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