14 February 2004	Saturday	22 Zilhaj 1424

KARACHI, Feb 13: Pakistan eurobonds have started trading at a premium in the international secondary market as the government did not upsize the $500 million Bond that generated total demand of $2 billion from potential investors.

Senior bankers said that international investors who failed to get these bonds at primary issuance on Thursday are now buying them at premiums from the secondary market on When Issued basis.

They said since clearing of most eurobonds take place in London the secondary market trading of Pakistan eurobonds is also taking place mostly in that city but also in other financial centres of the world.

Quoting rates for bonds prior to their availability is called buying them on When Issued basis. Buying of bonds at a premium means that investors are willing to buy the bonds at higher than their face value or they are willing to accept a yield lower than the announced coupon rate.

Senior bankers said that in the international secondary market investors were willing to buy Pakistan eurobonds at prices on which the yield works out to be 6.4-6.5 per cent against their coupon rate of 6.75 per cent.

This means that potential investors are willing to buy these bonds at yields that are 25-35 basis points lower than the coupon rate. Whereas the economic managers would like to highlight this fact as a proof to the success of the bonds well-experienced bankers have something else to say.

They say that the eurobonds are selling on premium primarily because offshore branches of Pakistani banks are keen to buy them from the secondary market. By definition eurobonds are not sold to the resident nationals of the country that launches them. Pakistan was no exception.

The $500 million eurobonds launched on Thursday were not for resident Pakistanis. Pakistani banks were not clear on whether their offshore branches can buy these bonds. Some of them sought clarification from the State Bank and they were told that their offshore branches could not buy these bonds. "But we know that this restriction was for buying the bonds at the primary issuance," said treasurer of a local bank. "Now that these bonds have been launched and are trading in the secondary market on When Issued basis the offshore branches of local banks can buy these bonds." The banker said the offshore branches of his bank also planned such buying.

Bankers well-versed with the international bonds market told Dawn that the State Bank could easily check Eurobonds buying by offshore branches of local banks by requiring them after some time to report all such buyings.

They said this seemed necessary to ensure that Pakistan has met its stated objective of launching $500 million bonds at a rate much higher than what its central bank is earning through placement of foreign exchange in the international market.

The economic managers have been saying that the primary objective of launching $500 million bonds was not to raise foreign exchange but to make a strategic reentry into the global bonds market after a lapse of seven years. Pakistan had launched its first Eurobond in 1994.

"If a major chunk of these bonds finally land at the offshore branches of local banks the idea of re-introducing Pakistan to the international fund managers would be defeated," said a bank treasurer.

Offshore branches of Pakistani banks find dollar-denominated Pakistan Eurobonds lucrative because of their relatively high yield. Senior bankers say wealthy overseas Pakistanis are also buying Eurobonds from the secondary market.

Some of them might also had bought these bonds at the primary issuance because they were not restricted from doing so. But official data is not available showing subscription to these bonds by expatriate Pakistanis.