KARACHI, July 7: A total of seven Term Finance Certificates (TFCs) were offered by the listed companies during the financial year ended June 30, 2008 to raise Rs5.57 billion, including which the total size of the Pakistani TFC market in the listed sector stood at Rs123bn. That represented growth of 5 per cent over the debt market at the end of FY07.

The total number of TFCs issued during FY08, though, fell short by one TFC over the earlier year, when corporates had issued eight such debt instruments, the amount was, nonetheless, impressively higher at Rs5.57 billion (USD81 million), compared to Rs2.57 billion (USD37m) raised in FY07.

The significant increase in amount was attributed by analysts to the preference by the banking sector to invest in TFCs and consequently the need for more regulatory capital in order to enhance their equity base.

Khurram Schehzad, at InvestCap observed that TFCs serve as Tier-II capital for banks which help them improve their Capital Adequacy Ratio (CAR) and higher CAR leads to higher loaning capacity. “In addition, the fertilizer industry raised capital through TFCs in order to meet the fund requirements to finance their mega expansions,” analysts said.

Out of the total number of TFCs issued during the year, 4 were from the financial sector (banks accounting for 43 per cent of the issues compared to 50 per cent last year). The banks that opted for TFCs included Faysal Bank Ltd -- Rs250m; United Bank Ltd -- Rs1.5 billion and NIB Bank Ltd -- Rs 1 billion. One leasing company (Saudi Pak Leasing) went on to offer TFCs in the sum of Rs200 million. Among the three remaining TFCs, two belonged to the fertilizer sector (Engro Chemical Pakistan issue worth Rs one billion and Pak Arab Fertilizer -- Rs1.25 billion). Pace Pakistan (grouped in the construction sector) issued TFCs valuing Rs375 million.

Analysts thought that the reason for lower number of TFC issues in the primary market during FY08 was mainly due to the deterioration of Pakistan’s credit rating during the year, which made it difficult for corporates to borrow money from abroad. That was compounded by a relatively tighter liquidity in the world markets.

In addition, the lack of liquidity and depth in the local debt market also discouraged more offerings. “The TFC market remained very small, which was just at 3 per cent of the equity market capitalisation,” analyst said.

Going forward, analyst believed that the rising interest rates may discourage more TFC issues. The government in the Budget for FY09 had announced 200bps increase in the NSS (National Savings Scheme) rates. This, coupled with the grant of permission to institutions to invest in NSS, as a means to bridge the country’s fiscal deficit, was seen to negatively affect TFC market. Analyst Schehzad said that the increase in banking sector assets (with rising inflation) could encourage banks to go for more TFCs in order to further enhance their CAR. Furthermore, banks were less vulnerable than other companies, since their lending rates provided adjustments to the rising interest rate scenario.