In November 2006, Pakistan Mobile Communications Ltd (Mobilink) launched a bond for $250 million, maturing in 2013 and carrying an annual coupon of 8.625%, the country’s first ever international high-yield corporate issue. It was also the first foray into the international capital markets by a Pakistani company for more than a decade.
ABN Amro and Deutsche Bank led the deal, which was 15 times oversubscribed, the highest ratio for any issue in 2006 aside from a $750 million tap by the Republic of Philippines two months earlier. Moreover, the bookrunners received orders from 230 investors around the world, significantly more than the 130 expressions of interest in a two-tranche issue by the sovereign, the Islamic Republic of Pakistan, in March 2006. Against this backdrop, yields on the notes tightened by around 24 basis points in the three days after the launch, despite the initial pricing that was well inside the tight end of the lead’s original guidance range (8.75-9.00%).
Mobilink faces a very competitive environment in Pakistan, which already has six players in the domestic mobile market. However, Yasmin Wirjawan, corporate credit analyst at ratings agency Standard & Poor’s in Singapore, emphasizes that the proceeds of the bond will further entrench Mobilink’s position as the leading player in the Pakistani mobile market. “Similarly to other emerging markets, the competitive position for mobile companies in Pakistan is mostly about network coverage. As all of the bond will be used to finance capex, which relates to network coverage and increased capacity, it will strengthen their competitive advantage.” Mobilink’s network reaches more than half the Pakistani population, including almost all urban areas, and the company already had 17 million subscribers as at August 2006, compared with just seven million for its nearest rival.
Plenty for Everyone
And, of course, there are plenty of potential new customers to go round, with mobile penetration at just 21% in Pakistan’s population of about 166 million. Moreover, fixed-line penetration is limited and unlikely to expand rapidly, given the costs stemming from the country’s mountainous terrain in many areas.
Against this backdrop, the bookrunners decided not to set pricing guidance too early in the process, to give potential investors time to assess the company’s individual story, the strong prospects for the mobile sector in Pakistan, and the sovereign and regulatory risk in a country with so few corporate cross-border issuers. This approach ultimately paid off, as investors discussed their desired outcomes for the deal realistically, and in some cases suggested pricing tighter than the leads had originally envisaged, says George Niedringhaus, head of emerging markets syndicate at ABN Amro.
“We wanted to just sell the credit story on the roadshow, and people were very excited about getting something so scarce and unusual in their portfolios, to help out with diversification strategies,” Niedringhaus tells Emerging Markets.
That credit story was also strengthened by the backing of Orascom Telecom (OT), the Egyptian-based parent that owns 89% of Mobilink. OT has extensive experience operating in emerging markets across North Africa and the Middle East, which was particularly helpful in preparing Mobilink executives for the roadshow.
“The team presenting was exceptionally strong; they played very well to the most sophisticated audiences; they were on top of their numbers; and they had spent time thinking about how to market the company. I would say their performance was as sophisticated as any developed market player,” says Niedringhaus.
As a result, one of the few disappointments for investors was Mobilink’s decision to limit their borrowing to $250 million. Given the strength of demand, bankers involved in the deal believed an issue even three times the size could have been closed at negligible extra cost. As it was, even the largest investors walked away with relatively small allocations.
Which, of course, left them calling for more. Wirjawan at Standard & Poor’s believes the other leading mobile operators might be contenders to come to market, given the high profile, sophistication and potential of the sector, in addition to their high capex needs for network expansion. Moreover, Mobilink has smoothed the path for future corporate issuers in the country, in particular by easing concerns from the State Bank of Pakistan over foreign exchange outflows related to servicing the notes, and responding to questions from the government regarding tax liabilities.
However, substantial liquidity in the Pakistani banking sector and hard currency financing for capital goods imports, available at competitive rates from foreign export credit agencies, have so far minimized the need for other companies to tap international bond markets. In addition, the regulatory environment means that many Pakistani companies have yet to make a compelling investment case. The banking sector is a potential source of new issues, but it may be that a return to the market by Mobilink itself is the best near-term hope for those seeking to take on further exposure to Pakistani corporate credit.