Conventional Route for Pakistan

The Government of Pakistan (B3/B-/B) has picked Citigroup, Deutsche Bank and Standard Chartered as joint lead managers to arrange roadshows in Europe and the US for a possible conventional bond Reg S/144A offering.

Pakistan’s Previous Sukuk Was Major Success

The decision to tap the conventional market over the Islamic Capital markets is surprising given that Pakistan previously tapped the sukuk market in November 2014 with a $1 billion 5 year issuance, a transaction which was five times oversubscribed with offers of $2.3 billion against initial size of $500M which was upped to $1 billion. Such demand allowed the Government of Pakistan to close the transaction offering a profit rate of 6.75%.

Motivations may be Financial as well as Political

The move by Pakistan may be a signal of weak sukuk market conditions with limited investor liquidity from traditional Gulf investors (who purchased 35% of Pakistan’s previous sukuk issuance) due to the drop in oil prices, or may represent a desire to diversify funding sources and tap conventional debt markets with a secondary aim of achieving a lower coupon rate than the 6.75% of the previous sukuk.

Alternatively a recent diplomatic spat between Pakistan and its traditional Gulf allies over Pakistan’s lack of participation in the conflict in Yemen against Houthis forces may have forced Pakistan’s hand to look at funding sources from conventional sources.

Saudi Arabia has recently similarly pursued a path of opting for conventional issuances over sukuk, though in its case, investors tend to be domestic financial services companies as opposed to Pakistan which will be tapping the international debt markets.