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Listed corporate bond market remains more active: State Bank

KARACHI (June 27 2003) : The State Bank of Pakistan (SBP) has said that the listed corporate bond market was relatively more active during the third quarter of this fiscal year.

The SBP in its third quarterly report released here on Thursday said that the quarter saw seven new issues worth Rs 2.7 billion as compared to just three issues worth Rs 2.2 billion in the same period of the last year.

With the issuance of these new instruments the total amount of outstanding term finance certificates (TFCs) has reached Rs 27.4 billion, still only 4.7 percent of equity market capitalisation.

Not surprisingly, given the continuing decline in the interest rates all of the fresh issues were floating rate instruments.

Also noteworthy is the issuers' apparent reluctance to use Pakistan Investment Bonds (PIBs) as the benchmark issues.

Seven of the last 10 TFC issues have been based on the discount rate.

This probably is the result of scarcity premium being attached to the PIBs following scanty fresh issues.

As customary, the bulk of each TFC issue was privately placed, ahead of limited initial public offering (IPO).

As a group, commercial banks were the most active participants in the pre-IPO market.

Of the total amount of TFC issued during the quarter, only 22 percent or Rs 580 million were offered in the IPOs.

Again, not surprisingly these meager IPO offerings attracted bids amounting to Rs 1.34 billion.

This has given rise to the suspicion that issue (advisors) probably underestimated the demand for TFCs, ie the issues were under priced (offered higher yield).

The historic low interest rates scenario has resulted in an enormous growth in the issuance of corporate debt.

In specific terms, the listed TFCs issued during July-March FY 03 increased by 28.6 percent as compared to the same period of the last year.

The secondary market date on corporate debt (TFC) is not robust owing to the shallowness of the market. Nonetheless, some analysis can be made on the basis of the spread between the corporate debt and the similar maturity government paper by taking the indicative secondary market quotes.

The spread hovered with the range of 2.5-3 percent during June-March 2003 and the secondary market rates of the TFCs have also fell in line with the declining PIB rates.

The average spread of 2.6 percent during the same period reflects the risk premium required to make the corporate debt attractive vis-a-vis the government's (zero risk security) of five-year maturity.

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