KARACHI, Oct 29: For the private debt market, financial year 2001 reflected excitingly encouraging trend since as many as 10 new Term Finance Certificates (TFC) were floated during the year. These equalled the TFC offers in all of the last five fiscal years, combined.

The SBP while acclaiming the growth of the domestic debt market, said: “However, secondary market transactions in TFCs remained negligible as most of the investors prefer to buy and hold”.

The SBP report goes on to say that the future outlook for TFCs looks optimistic for both investors and issuers.

Explaining the reasons for the robust growth of the TFC market, the SBP says that companies that previously relied heavily on Development Finance Institutions (DFIs) for term borrowings were now looking at the bond market to meet their future financial needs. Those DFIs, in turn (previously) received considerable funding from International Financial Institutions, as part of their past strategy of directed development. “Since this strategy has largely failed, the IFIs no longer support DFIs, particularly leasing companies”, SBP says, adding, that for this reason, most of the TFCs were being launched by Leasing Companies.

The SBP says that leasing companies sought to seek funds through TFCs because they need long-term funds to match their lease portfolio. “Interestingly, however, not all the funds generated through TFCs are channelled to industrial sector to finance its expansion”, says the State Bank, adding that a growing chunk was used to finance consumer durables like cars, motorcycles, electronics etc.

The Bank observes that Pakistan’s corporate debt market has come a long way since 1995. In order to make issues more flexible and affordable, issuers are adding different features from shelf registration to the green shoe option to the TFC structure.

“Despite these positive developments, there are still issues that need to be resolved”, the Bank says, and admits that the SECP is actively streamlining the process for issuance of TFCs by reducing costs and simplifying the procedure for approval. On similar lines, the KSE has reduced the annual listing fee for TFCs; reduced broker commission and initial listing fee, beside revoking the fixed service charge. Additionally, CDC has reduced annual registration fee for TFCs. Furthermore, the government has continued its policy of reducing stamp duties and withholding tax on profits.

But for all those good things, the SBP notes that the supply of TFCs is still limited, notwithstanding the healthy appetite of TFCs by institutions and retail investors. Major institutional investors would welcome additional investment opportunities for TFC issues, says the Bank, subject to acceptable profit rates. Moreover, many investors (especially retail investors) do not fully understand debt securities.

Additionally, intermediaries, have difficulty participating in the market due to the lack of short selling. Market makers are therefore unable to provide two-way quotes to secondary market players, which would strengthen and deepen this market, SBP says, concluding: “However, the approval of short selling is unlikely in the near future because of limited TFC issues”.