Pakistan goes Conventional over Islamic Sukuk for Debt

Pakistan successfully issued on Friday a new Bond of $500 million with a maturity of 10 years in the international Eurobond market, Radio Pakistan reported. Pakistan was hoping to raise $1bn but was only able to raise $500 million at a rate of 8.25% with a 10 year maturity. The yield on the 2024 bond Pakistan sold last April has dropped from 8.46 per cent at issue to 7.29 per cent today.

Roadshows were conducted for launching the bond in London, Los Angeles and Boston by a team comprising Finance Secretary Waqar Masood Khan and Governor State Bank of Pakistan Ashraf Wathra. Finance Minister Ishaq Dar led the final roadshow at New York on Wednesday and the pricing of the bond was held on Thursday.

November 2014 Sukuk was Received Better in Market

In contrast to the current challenges of the conventional debt market, Pakistan was able to achieve a better reception for its Sukuk issued in November 2014. The 5 years issuance for $1bn was upped from an initial target of $500 million. The sukuk was five times oversubscribed with offers of 2.3 billion and achieved a significantly lower profit (coupon) rate of 6.75%.

The move by Pakistan may be a signal of weak sukuk market conditions with limited investor liquidity from traditional Gulf investors (who purchased 35% of Pakistan’s previous sukuk issuance) due to the drop in oil prices, or may represent a desire to diversify funding sources and tap conventional debt markets.

Alternatively a recent diplomatic spat between Pakistan and its traditional Gulf allies over Pakistan’s lack of participation in the conflict in Yemen against Houthis forces may have forced Pakistan’s hand to look at funding sources from conventional sources.

Saudi Arabia has recently similarly pursued a path of opting for conventional issuances over sukuk, though in its case, investors tend to be domestic financial services companies as opposed to Pakistan which taps the international debt markets for dollar funding requirements.