PAKISTAN has successfully launched its first Euro-convertible bond issue in spite of a collapse in the global bond market caused by a series of interest rate hikes by the United States Federal Reserve. The seven-year notes, which raised US$45 million for Dewan Salman Fibre, were lead-managed by Citicorp International and Crosby Securities and represented the first time a Pakistani company had tapped the international capital markets. Dewan Salman plans to use the funds to finance the doubling of its production capacity. Convertible bonds are debt securities that may be exchanged for common shares in the issuing company at a predetermined price. Dewan Salman's five per cent coupon is due in 2001 and is convertible into Dewan common shares at 195 Pakistani rupees (about HK$50.31) per share. This price represents an eight per cent premium over Dewan Salman's closing share price on April 11, the date the company started its roadshow in Hong Kong to promote the bonds. For the issuer and its underwriters, the timing of the issue could not have been more awkward. As Vincent Fan, chief executive of Citicorp International, said last week, the bond market had just started its bull run and investor sentiment was strong when the company started planning its offer in March last year. However, by the time the issue started its Hong Kong roadshow, the Fed had raised short-term interest rates twice - on February 4 and March 22 - and sent equity and bond holders scurrying for cover. Mr Fan said: ''When the Fed first raised interest rates, the bond market started to retreat, but we still had sufficient investor interest and appetite to carry on with the transaction.'' However, on April 18, the day before the international roadshow ended, the Fed raised interest rates by another quarter percentage point and the bond market collapsed. ''It was a nightmare . . . since March 1993 we had worked with the company, prepared them for it, investor reception was excellent, we finished the roadshow and one day before pricing, the whole sky fell on us,'' said Mr Fan. Moreover, political chaos broke out in Karachi last month with militant groups opposing Prime Minister Benazir Bhutto waging a violent campaign that resulted in at least 14 deaths and more than 70 injured. However, Mr Fan said it never crossed the minds of the underwriters to postpone or cancel the offer, as investors had been enthusiastic towards the issue and it was clear ''it had enough demand to proceed in the difficult and taxing circumstances''. Citicorp director K S Butalia said the underwriters had to increase capacity in some cases to accommodate all the investors who wanted to participate in the offer. ''People were quite excited because this was the first issue from Pakistan,'' he said. To make the offering a little more attractive, the issuers decided to stick to an eight per cent premium, even though Dewan Salman's share price had jumped 17 per cent between April 11 and 18. Mr Fan said there were several other issues pending approvals from the Pakistan Government and the likelihood of another Euro transaction from the country within the next 40 to 45 days was high. He said the government was watching to see if other issues under consideration were workable in the present environment and if so, under what terms and conditions. ''They are conscious of the fact that Pakistan as a country and a issuer has its reputation at stake if an issue is not done or received properly.'' The Dewan Salman sale came amid news that Indian telecommunications concern Videm Sanchar Nigam Ltd (VSNL) had postponed its $1 billion Euro-equity issue. The issue was withdrawn despite strong interest at a lower price of 1,100 to 1,200 rupees per global depositary receipt, against an original range of 1,400 to 1,600 rupees. Mr Fan said he sympathised fully with Salomon Brothers, lead underwriter of the VSNL issue, because ''they must have gone through hell . . . no merchant banker would pull an issue if they can help it''. However, he said the positive side to the VSNL issue was that there was now $1 billion more liquidity in the market, as the offer had locked up a lot of money. Mr Fan said that despite the VSNL postponement, there was still money left in the bond market to absorb an issue, but an underwriter would have to make sure ''it is properly structured and priced''. Mr Butalia said: ''There's that billion dollars at the right price for the right deal. The good news [of the VSNL episode] is that the supply of paper [coming out of India] will be now a little bit under control.'' Dewan M Zia-ur-Rehman Farooqui, chairman of Dewan Salman, said that in spite of the political problems in the country, investor confidence was high at the moment. He said the Bhutto government was ''pro-business and pro-investment and that is one of the reasons why they have encouraged companies like Dewan to go to the international capital market''. Dewan Salman is a joint venture of Korean polyester fibre producer Sam Yang Co, Japan's Mitsubishi Corp and the Dewan Group, a family-owned company with businesses including textiles and sugar.
