debt” before agreeing to any
assistance programme.
Lagarde’s comments
highlight concerns in
Washington that Pakistan may
seek to continue servicing
its liabilities under Chinese-
financed infrastructure
projects at the expense of other
creditors.
A senior restructuring banker
said it would be “fascinating”
to see if Pakistan manages to
exclude some bilateral debts
from an IMF programme.
“The IMF has undertaken
lots of reforms in the last few
years to stop its money being
used to pay other creditors [as
happened with Greece] and has
changed its rules to do this. But
I am not sure how it will get on
here.”
Chinese debts have become
a key topic in emerging and
frontier markets in recent
years, thanks to a jump in
lending under the Belt and
Road Initiative. China has
committed US$62bn to Pakistan
alone, mostly through loans
from its state-run policy
banks to back projects on
the China-Pakistan Economic
Corridor. Even though most
of the financing comes with
long tenors and low rates of
interest, the additional debt has
worsened Pakistan’s already
precarious fiscal position.
Mike Pompeo, US secretary
of state, warned in July that
the US would oppose any
IMF bailout if the funds
were used to pay off Chinese
loans, although he softenedthat position in September,
according to Pakistani officials.
Fitch said in August that
Pakistan’s new government
would need external sources
of funding to support the
economy, warning that an IMF
package could be “complicated”
by China-US tensions.
“US pressure could lead
to stricter programme
conditionality, including thecurtailment of CPEC projects
and greater transparency in
CPEC financing,” said Jeremy
Zook, Fitch associate director.BOND BOUNCE?
Pakistan is not known to
be in talks with banks or
restructuring advisers, and
bankers say talk of any debt
exchange is premature.Its next US dollar bond
maturity is a US$1bn 7.25%
April 2019, trading close to par
at a yield of 7.5%, down from
9.7% four months ago.
Pakistan’s dollar bonds
have recovered strongly since
June, on optimism around
a change of government. Its
December 2027s were bid at
8.02%, having briefly gained
1.5 points following news ofPakistan’s plans for an IMF
facility, according to Tradeweb.
The bonds had ended 2017 at
6.8% and peaked at over 9% in
late June.
Johanna Chua, head of Asia
Pacific economic and market
analysis at Citigroup, said
Pakistan’s US dollar sovereign
bonds were unlikely to move
much until the terms of any
support package become clear.
“Given the size of the
funding gap, we don’t think
Pakistan dollar bonds can rally
too much, after it had already
outperformed Sri Lanka by
about 80bp in the last month,
until we get more clarity on the
size of the program and other
financing sources,” Chua wrote
last Tuesday.
“If the overall financing
picture becomes clearer and
deemed adequate, we think
Pakistan spreads can trade
almost flat to Sri Lanka as it did
in late 2015-16.”
Sri Lanka’s May 2027 US
dollar bonds have widened over
80bp since the start of October
to a yield of 7.9%, from 5.4% at
the start of the year.
Additional reporting by Chris Spink
and Daniel StantonFor daily news stories
visit http://www.ifrasia.comthe central bank might also
announce tighter capital
adequacy regulations and lower
reliance on wholesale funding,
particularly for weaker firms,
said DBS Research in a note
dated October 10.
NBFCs increased their
reliance on short-term
borrowing in recent years as
they grew rapidly, but this
strategy has left them exposed
as interest rates rise.
The measures by the SBI and
NHB will help the higher-rated
companies meet near-term
funding requirements.
“The net outcome of these
measures is that companies
which are adequately
capitalised, running a low
leverage, and have a good
credit rating and track record
will continue to be able to raise
funds from the market,” said
Indiabulls Housing Finance’s
Mittal. “The nervousness
in funding through the
commercial paper route has
eased off in the last few days.”
INDIABULLS HOUSING FINANCE
raised Rs2bn from two-month
CP placed with mutual funds
at 7.7% on October 10 and has
raised Rs34.65bn from other
sources including securitisation
and bonds since September- “We have been and will
continue to raise money
through bank loans, external
commercial borrowings and
long-term bonds to meet our
funding requirement,” said
Mittal.
Highly rated NBFCs have
started coming back to the
market.
LIC HOUSING FINANCE raised
Rs9.12bn from 10-year bonds
at 9.08% on October 9, HOUSING
DEVELOPMENT FINANCE CORP raised
Rs29.53bn from 10-year bonds
at 9.05% on October 12 and
MAHINDRA HOUSING FINANCE plans to
raise up to Rs1bn from two-year
347-day bonds at 9.7521%.ALTERNATIVE SOURCES
With expectations of tighter
regulations, some NBFCs
have started looking at other
sources such as ECBs to
strengthen their liquidity and
ALM profile.
Last week, PNB HOUSING FINANCE
raised Rs14.8bn from a debut
ECB loan for a tenor of five
years. “It raised funds at Libor
plus 120bp, lower than onshore
pricing for the same tenor at
8.06%, after hedging,” said a
source close to the plans. “The
ECB loan for five years supports
the ALM and reduces the short-
term exposure.”
Some NBFCs are also looking
at selling bonds to the public.
Last week, SHRIRAM TRANSPORT
FINANCE announced the yields
and bookbuilding dates for an
offering of up to R13.5bn viathe public route, which offers
the flexibility of longer tenors.
“The retail investors looking
for a higher interest rate do
not mind taking exposure to
longer tenors,” such as five and
10 years, said Ajay Manglunia,
head of fixed income at
Edelweiss Financial Services.
As real money and
institutional investors
increasingly avoid NBFC
paper, refinancing through
the commercial paper route is
expected to decline. As a result,
costs at the short-end of the
curve will rise and some NBFCs
may have to pare growth.
“Housing finance companies
are also looking to sell their
portfolio off to institutional
investors, foreign investors and
fund houses,” in addition to
selling their portfolio of assets
to banks, said Sandeep Bagla,
associate director at Trust
Capital. “Given the size of the funding gap, we don’t think
Pakistan dollar bonds can rally too much, after
it had already outperformed Sri Lanka by about
80bp in the last month, until we get more clarity
on the size of the program and other financing
sources.”