The Islamic Republic of Pakistan is back. A group of three banks — Credit Suisse, Standard Chartered and United Bank — have provided it with a $100m 360 day loan, with the sovereign now hoping to raise an additional $65m in general syndication to activate a greenshoe option.
Pakistan’s loan size may be small but the fact that it has decided to tap the market after a 15 year absence is noteworthy. Not only that, it has also become the first Asian sovereign to take a loan since 2008, when the Democratic Socialist Republic of Sri Lanka borrowed a $170m three year facility.
But one key difference with Pakistan’s loan is that it is not relying solely on support from Middle Eastern lenders to drive demand — typically keen to invest in this kind of credit — and is instead also counting on Asian banks to join. This is a sure sign that the Asian loan market has matured.
Take the example of the Sri Lankan sovereign’s financing from 2008. This $170m loan was closed as a club with a group of nine banks, according to Dealogic, which comprised four Indian banks, two international and three Middle Eastern banks.
But when it comes to Pakistan — rated B- by Standard & Poor’s and Caa1 by Moody’s — although Middle Eastern lenders are likely to play a key role in its new fundraising, it is the Asian bank market that will be the main focus. And the sovereign is unlikely to be left disappointed.
There are various factors working in favour of its strategy, not least of which is the fact that Asian banks have been brimming with liquidity this year and are more eager than ever to lend. Secondly, hand-in-hand with the liquidity has also come a much greater appetite among lenders to take on riskier credits.
Banks are now keen to look lower down the credit curve and, importantly, are willing to undertake as much due diligence as needed and ready to soothe any repayment fears that may arise among potential lenders.
Already this year borrowers from countries including Sri Lanka and Vietnam have successfully completed loans, when they would have been shunned a few years ago.
Luckily for Pakistan, it has read the market conditions well and is offering a very generous margin of 400bp for its fundraising — which some bankers in fact reckon is too high for the sovereign and that it could have closed a deal by paying less.
The rarity element of the credit also bodes well, especially as the deal hit the market just months after a new government took office to widespread optimism among market watchers.
Pakistan has certainly timed its transaction well with banks across Asia already eyeing the deal in numbers. Now all it needs is for Asian banks to show they are ready for the challenge.