Union, Al-Falah banks to issue bonds for raising capital

KARACHI (December 14 2002) : Pakistan's two banks plan to issue bonds this month to raise their minimum capital requirements, encouraged by a central bank ruling earlier this year to use bonds for this purpose, financial sources said on Friday.

The State Bank of Pakistan wants local commercial banks to double their minimum paid-up capital by the end of 2002 to Rs one billion ($1=Pk Rs 58.42) from Pk Rs 500 million currently. Proceeds from the bonds will act as Tier-II capital.

Union Bank Ltd is offering Rs 750 million in bonds, while Bank Al-Falah Limited will offer Rs 650 million. Both bond offerings, or term finance certificates, as they are called in Pakistan, will be open to subscription in the current month.

Union Bank's five-and-a-half-year maturity will be split into two tranches –Rs 600 million will be taken up by institutional investors, while Rs 150 million will be offered for public subscriptions, a term sheet for the bond seen by Dow Jones Newswires said.

The public offering will open on Dec 19 and close on December 21.

The bond will carry a floating rate of 2.25 percentage points above the last cut-off yield on the five-year government bond, which was 8.27 percent at the last auction.

However, the interest rate will have an upper and lower limit of 15 percent and 11 percent, respectively, according to the term sheet.

Bank Al-Falah Ltd, which is backed by Gulf and Pakistani investors, is offering a six-year maturity, with institutional investors taking up Rs 500 million, while Rs 150 million will be offered for public subscription.

The bond carries a floating rate of 1.35 percentage points above the last cut-off yield on five-year government bonds.

The interest rate on the bond has a floor of 10 percent and is capped at 15 percent, the term sheet said.

Subscriptions will open on Dec 19 and will close the same day.

A fund manager for Bank Al-Falah's bond told Dow Jones Newswires that the money will be used to raise its minimum capital and to help fund the bank's long-term operations.

These latest bond issues show how large Pakistan's companies and banks have increased their reliance on the nascent bond market to tap long-term funding.

Pakistan's third-largest bank, Muslim Commercial Bank (MCB), was the first to take up the central bank's new ruling when it issued a Rs 1.6 billion five-and-a-half-year bond in August.

In the 11 months to November, 14 corporate bonds worth Rs 8 billion were issued, compared with 17 new issues worth Rs 12.33 billion last year. Pak-Arab Refinery Limited's Rs 2.5 billion bond issued last year was the largest domestic offering to date.

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