Developing corporate bond markets
In contemporary economies, debt/bonds markets are an integral part of the financial sector and effectively supplement corporate funding provided by banks.
And from the conventional perspective, bonds can be defined as a long-term contract under which a borrower agrees to make payment of interest and principal, on specific dates, to the bondholders.
Bonds are actually certificates or documents of debt issued by a government or an organisation.
Corporate bond commonly called TFC (Term Finance Certificate) was issued by Packages Limited in 1995, whereas detailed regulatory coverage of redeemable capital issued is addressed under section 120 of the Companies Ordinance 1984.
The domestic corporate bond market has witnessed higher activity recently, with the government, being regulator and participant at same time, addressing the power sector crises by issuance of TFCs.
The recent successfully subscribed debt issues of Standard Chartered Bank (Rupees two billion) and KESC Azam Certificates (Rupees two billion), before the closing period, shows that demand for corporate debt is profound. At the same time, the domestic market witnessed innovation when Treet Corporation Limited announced to raise Rs1.255 billion through issuance of Participation Term Certificate (PTC).
PTC is a convertible and redeemable bond structure, which would not only deliver an interest payment but also issue a predetermined number of shares till its maturity.
In the present scenario, the available corporate TFC’s offer investors a viable, high yield alternative to the NSS (National Saving Scheme) and bank deposits, as they provide a credit spread over the benchmark KIBOR. They are also an essential complement to risk free and lower yielding government bonds such as PIBs, with less interest rate risk as most of them have floating interest payments. This feature of floating interest rate payments are usually aligned to prevailing interest rates throughout the maturity of instrument and has attracted banks and mutual funds which have become an active player in the secondary interbank market for trading their large TFC portfolios generating liquidity for an active market.
However, lack of technical skills, unavailability of a formal trading platform similar to equity markets, illiquidity leading to inefficient price discovery mechanism, and absence of formal settlement procedures have limited the participation in this asset class, to financial institutions and to an extent, high net worth individuals.
The major challenge to increase the activity in corporate bonds trading are, price discovery mechanism and counterparty settlement issues, which is due to the absence of a central settlement system, as currently listed and unlisted debt securities are settled in different manner.
Security and Exchange Commission Pakistan has been active in formulating and implying effective trading procedures to move to transparent execution. Recently, implied practices such as compulsory to report unlisted transactions to NCCPL and also availability of listed securities traded prices on BATS to all, have helped to attract interests in corporate bonds.
Though, these instruments are being brought under KSE (Karachi Stock Exchange) and NCCPL umbrella, bringing a separate dedicated portal, will ensure efficient price discovery and encourage more companies to issue their debt instruments.In 2011 and 2012, seven and four TFCs have been listed respectively at KSE. Though, BATS (Bonds Automated Trading System) currently provides a trading platform for listed corporate debt instruments (TFCs) at KSE, the vision should be to also trade PIBs, T/bills, as per approval of the State Bank of Pakistan in coming times.
If all the stakeholders synchronise their interests to run BATS as a single efficient bonds trading portal, it may attract international hedge funds to the domestic bond market. Large regional capital markets portfolio players include Indian corporate bonds in their funds portfolio.
As the path has already been laid for the Pakistan’s corporate sector to tap the capital markets with debt securitisation, the focus of the efforts in the next phase of development should be on providing easy access to investors.
Malaysia, which issued its first Sukuk bond in 2002, now constitutes roughly 60 per cent of international Sukuk markets due to its efficient secondary market trading mechanism. Product innovation, ensuring global compatibility and acceptance will also attract general public, a recent example being Engro Rupiah, where branding and promotion played a vital role in raising subscription.
The regulators and financial institutions have to ensure that more corporate bodies come forward to structure new and innovative compliant financial products along with an easy access to a single trading platform which can contribute to the promotion and growth of capital markets.
This would be a win-win situation for both borrower(issuer) and lender (investor), as it would offer an alternate, viable yield asset class to investors as well as provide an avenue for corporations to raise cheaper money from other than the banking sector.