KARACHI, May 31: There have been a string of successful Term Finance Certificate (TFC) issues in the first five months of the current year, which analysts attribute to drop to single digit returns on government securities, an uncertain equity market and the diminishing demand for the dollar.

The appetite for corporate debt market began last year, when 17 new TFCs valuing Rs12.3 billion were floated. These outnumbered the 10 TFC offers that had entered the market in all of the previous five years, combined.

At least six TFC issues are in various stages of approval and listings at the stock exchange. These include: Union Leasing, Shahmurad Sugar, Saudi Pak Leasing, Sui Southern Gas, NDLC (2nd public issue) and Sitara Chemical Industries. By contrast, there have been only two equity flotations this year: those from WorldCall Multimedia and 10 per cent disinvestment of government holding in National Bank of Pakistan. But what is it that makes the market absorb the flurry of corporate debt?

“Ever since the January 1999 Paris Club rescheduling, government has become increasingly cost-aware,” says Austin Ismat, analyst at brokerage First Capital Securities. The analyst says that for this reason, with rescheduling lowering the domestic demand for foreign currency, interest rates have been rationalized (lowered) across-the-board. Thus banks (6-month T-bill rates touching 7 per cent); individuals (NSS rates have declined by 380 basis points) and financial institutions (barred from NSS investments completely) are all struggling for funds.

Ismat believes that the investors’ penchant for corporate debt is not likely to die down in the near future: “With the government toeing the IMF line and our new political alliances, it seems unlikely that our Balance of Payment sunshine will end soon,” says the analyst. As such low interest rates are likely to continue well into financial year 2003. Further, analyst expects 150-200 basis points cut in the NSS rate to be announced in budget 2002-03 to realign the real yield curve (CPI adjusted). But for all that, some people worry that two issues could stem the tide of TFCs: absence of secondary market and taxation.

One of the proposals for the upcoming federal budget 2002-03 forwarded by the Karachi Stock Exchange relate to the tax on income from TFCs. The Exchange has observed that income received by any person from rated and listed TFCs was exempt if issued on or after September 14 1997.

The exemption was withdrawn in relation to income received by any person other than a company w.e.f assessment year 2002-03. KSE has urged the government to restore the exemption for both individual and institutional investors of all listed TFCs.

Some market players believe that much of the funds that flow into the TFCs come from the financial institution and may have little to do with the money that may have slipped out of the stock exchange. But other analysts say that for investors who do not have appetite for the roller-coaster rides that the KSE offers, TFCs may seem just the right kind of middle-of-the-road option. “Thus, while corporate risk exceeds GoP risk, so does the return. And that capital guaranteed clause (if you hold to maturity) looks attractive to investors not wanting to weather the vagaries of the KSE,” says the analyst following the corporate debt market.