January 31, 2014
IPO Summit 2014, Karachi
Corporate debt market
Capital markets: Listings & public offerings
Shajar Capital Pakistan
Private & Confidential
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Shajar Capital
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Introduction – Full service brokerage house
– Membership of Karachi Stock Exchange and Pakistan Mercantile Exchange
– Nationwide presence – Islamabad, Lahore and Karachi
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The Group
– Family based business established in 1956
– At present, the group has portfolio of diversified business lines starting from warehousing,
packaging, trading, textile, financial services, oil marketing, and healthcare sectors
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Achievements
– Amongst the top full services brokerage houses
• Ranked No. 2 in Fixed Income/Money Market
• Equity market share of 2 to 3%
• Unbiased – No proprietary book
Private & Confidential
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Shajar Capital Pakistan
Investment banking
Corporate Finance & Advisory
• The team at Shajar Capital serves as a trusted advisor to mid-tier clients, helping them achieve
their strategic objectives and meet their financial needs
M&A Advisory
Sell side Advisory
Buy Side Advisory
Restructuring
Transaction
Support
Structuring
Support
Fund Raising
Capital Raising
Management Consultancy Services
• Shajar Capital has entered into local representation arrangement with ICF International
Company – to strengthen its consulting portfolio.
• Shajar represents ICF on potential consultancy assignments in aviation and other selected areas in
Pakistan.
Private & Confidential
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Shajar Capital Pakistan
Team credentials
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M&A Advisory
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Fund Raising
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Buy-side advisory for acquisition of Admore Gas (Pvt.) Ltd
Manager to offer for acquisition of JS Global Capital by JS Bank Limited
Sell side advisory to Union Bank for sale of operations to Standard Chartered Bank
Buy side advisory for acquisition of Saudi Pak Bank by Sinthos Capital
Financial and banking advisors to Hashoo Group
Financial advisors to Dewan Group
Capital raise for a reputed Media House in Pakistan
Capital raise for Sugar milling facility in Africa
Advised on issuance of TFC by Saudi Pak Leasing
Restructuring
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Debt restructuring of Mohammad Farooq Textile Mills Limited
Debt restructuring of Dewan Group companies
Private & Confidential
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Issuance of Corporate Debt
DEBT SECURITIES: LISTED VS. UNLISTED
Private & Confidential
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Issuance of Corporate Debt
Capital Raise: Options
• Typical reasons
– Expansion / Diversification of production facilities
– Financing for new projects
– For acquisition purposes
– To retire expensive debts
– To augment the working capital
– Balancing, Modernization and Replacement (BMR)
• Financing options:
– Fixed securities – banks – syndicated financing or TFC/ Sukuks
Private & Confidential
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Issuance of Corporate Debt
Corporate debt market
Corporate Debt act as “spare tyre” – substituting for bank lending as a source of corporate funding,
when bank’s balance sheet are weak or banks facing credit rationing – (Alan Greenspan)
Advantages for Investors
• Alternative avenue for Fixed Income
Investment other than bank deposits,
NSS and Govt. securities
• Higher interest rate
• Conversion option
• Independent monitoring –trustee
• Exemption from capital gain tax
unlike equities
• Ability to sell/transfer
Advantages for issuers
• Cheaper source of funding
• Diversification of funding source
• Predictable financial obligations
• Greater access to credit
• Efficient pricing of debt
Economic development
Infrastructure and Municipal bonds
Private & Confidential
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Issuance of Corporate Debt
Listed vs. unlisted: Debt securities
Lender dominated
Issuer dominated
Conventional bank borrowing
Corporate debt market
• Restrictive covenants
• Standard clauses that leave issuer
with lots of latitude
• Maintenance of Certain Ratios
• Constraints on Payouts/Profit
distributions
• Constraints on disposals, issuance
of new debt etc.
• More suited to fulfilling the
working capital requirements
Private & Confidential
• Broader investors base
• Public bonds issuance make
companies more well known
• Better credit rating, resulting in
better pricing
• Flexibility in call/put options,
conversion provisions, etc
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Debt securities in Pakistan
Corporate debt market
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Corporate debt market exceeds PkR125 bn
– Issuance and trading of corporate bonds dates
back to 1960-70
– First corporate TFC was issued in 1995
– 2001-07: Best period in terms of issuance and
growth
– Declining trend: In 2013, there was only 2 new
TFC issue versus a recent high of 25 in2008
Recent history of TFC issues in Pakistan
(PkR bn)
Offer size (LHS)
No. of Issues (RHS)
80
30
70
25
60
20
50
40
15
30
10
20
5
10
Private & Confidential
2013
2012
2011
2010
2009
2008
Government debt securities is around PkR 8 tr
– 77% are MTBs, Discounted, Short term security
– 18% are PIBs Coupon bearing, Long Term
Security
– 5% in Sukuks Coupon bearing, Medium Term,
Islamic
2007
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0
2006
0
Source: Shajar Research
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Debt securities in Pakistan
Some recent issues
Limited participation from mid-tier institutions or emerging companies
Issuer
Bank Alfalah
Jahangir Siddiqui & Company Ltd
Karachi Electric Supply
Standard Chartered Bank
Pakistan Mobile Communication
Bank Al-Habib Ltd
Engro Corporation Ltd
Private & Confidential
Issue Date
Feb-13
Oct-12
Aug-12
Aug-12
Jun-12
Jun-12
Apr-12
Jun-11
Feb-11
Sep-11
Issue Size Tenor
Interest Rate
Security Type
(PkR bn) (years)
Cycle
5
1
1.2
0.5
2
4
4
0.3
0.4
0.2
8
4
3
5
10
2.5
2
10
3
3
Floating
Floating
Fixed
Fixed
Floating
Floating
Floating
Fixed
Fixed
Fixed
Semi
Semi
Quarter
Quarter
Semi
Quarter
Quarter
Semi
Semi
Semi
Rate
6mths KIBOR + 1.25%
6mths KIBOR + 2.40%
14.75%
15.50%
6mths KIBOR + 0.6%
3mths KIBOR + 2.65%
3mths KIBOR + 2.65%
15.00%
14.50%
14.50%
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Debt securities in Pakistan
Limited offerings and volumes
Compared to equities market, the volumes in debt market are significantly lower
Average daily turnover of equity market
TFC volumes negligible to equity market
PkR bn
1,000
0.5%
Source: Shajar Research
Jan-14
Dec-13
Nov-13
Oct-13
Sep-13
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
0.0%
Jan-13
-
Jan-14
1.0%
Dec-13
2,000
Nov-13
1.5%
Oct-13
3,000
Sep-13
2.0%
Aug-13
4,000
Jul-13
2.5%
Jun-13
5,000
14
12
10
8
6
4
2
May-13
3.0%
Apr-13
6,000
Mar-13
TFC's Traded Value (LHS)
% of equity trade (RHS)
Feb-13
PkR mn
Jan-13
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Source: Shajar Research
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The daily average volume traded in KSE during the last 1-year TFC is mere 0.4%
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Recent trading pattern reveals that investors interest is mainly confined to 2-3
certificates
Private & Confidential
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Challenges and initiatives
Automated trading
Corporate debt securities
• Introduction of BATS (Bond Automated Trading System) for trading of debt
instruments
• Central price discovery, formal trading interface and valuations at EOD
• Phased approach towards Debt Market development
– MUFAP and KSE joined hands for development of corporate debt market
– Trading – KSE; Settlement – NCC; Custodian – CDC
– TFCs are being traded through BATS
Private & Confidential
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Challenges and initiatives
Automated trading
Government debt securities
• From February 2014
• Market participation
– Primarily dominated by banks, Financial Institutions and High Net Worth
Individuals
• It will provide much needed depth to capital markets
– Initiative of bringing retail investors through exchange traded government
securities
– Though, the development is still in infancy stage, the product will provide
alternative venue to investors
• Trading mechanism needs to be sorted out – that includes settlement issues,
taxes, other charges and price quoting issues
Private & Confidential
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Challenges and initiatives
Constraints on market development
A large number of people have invested their funds in banking savings deposits, National
Savings, due to unavailability of alternative high yielding fixed income investment avenues.
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Lack of benchmark Rate
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Crowding out effort of government borrowing
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Economic volatility – investor bias for short term
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Investor ignorance/awareness/Trust deficit
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Weak liquidity profiles of corporate bonds
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Long Lead Time
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Not enough listing and fresh issues
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Inactive secondary market with absence of central price discovery mechanism
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Inflation and exchange rate variations causing hindrance in foreign investment
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Weak market infrastructure
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Need for capacity building by SECP and SBP – New rules under consideration
Private & Confidential
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ROLE OF AN “ADVISOR”
Private & Confidential
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Role of an advisor
Assistance in regulatory aspects
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For debt securities
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Approval by Stock Exchange/s, SECP & SBP
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Rated by a credit rating agency recognized by SBP
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In case of a secured instrument, a charge on the assets of the issuer is created
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Finalization of information memorandum and prospectus
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Pre-IPO portion of the total issue should be placed before getting approval from the
regulators
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Appointment of trustee, market maker and Bankers to the issue
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25% or less of the total issue should be offered to the general public
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Other aspects – minimum size restrictions on issue and entity, clean CIB, rating of
BBB, etc
Private & Confidential
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Role of an advisor
IPO Valuation Process
Max
Preliminary Valuation
Min
Roadshow and
bookbuilding
Investor education
1 month
Underwriters’
preliminary
valuation
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1 month
Analyst
Presentation
Price Range
Analysts’ Valuation
2 weeks
Publication of
Analyst’s report
Offering Price
Aftermarket and stabilization
2 weeks
Price range set-up
IPO
Prospectus
Roadshow Presentations
Considerable
amount
of
information is provided to
ensure a full understanding of
Company’s business and sector
Presented by management to
research analysts
Private & Confidential
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Research
analyst
write
detailed research notes on
the Company
Includes analyst’s view on
the
valuation
of
the
Company using several
valuation methodologies
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Opportunity for company to
articulate
story
and
investment
opportunity
face-to-face to investors
Presented by management
to investors using the
roadshow
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Disclosure
of
all
material facts about
the company
Legal
document
prepared
by
Company’s
legal
counsel and advisors
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Role of an advisor
Key to successful issuance
Prepare Early
• Prepare at least a year before
• Commit resources
• Assess the time it will take to go
public
Outperform Competitors on key
benchmarks
• Financial Factors
• Non-Financial Factors (Corporate
Pre-IPO Optimization
Governance etc.)
• Debt refinancing
Offer Structure
• Greenshoe option would enhance
• When the market is gaining
momentum, it’s the right time to go
• Corporate Re-organization
• Private Placements
Market Timing
Investor Education and Marketing
• Articulate compelling equity story
• Research reports
public
• Industry performance
• Sentiments torwards Pakistan
• Road show presentation and book building
investor confidence over the
company.
• Competing offer
Private & Confidential
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Role of an advisor
Investor perspective… value maximization
Corporate Model
Strategy
Develop realistic corporate model aligned with business plan,
actual results and operational planning process and use it to
form a realistic view on valuation and drivers
Differentiation
Risk Mitigation
Mitigate risks in advance of placement (legal, accounting,
structural, etc.)
people
to
the
Pre-IPO Market Testing
Test Investor demand and prepare for the public markets by
way of a private placement and/or Eurobond
Private & Confidential
Develop key differentiating business story points and establish
key selling messages
Pre-IPO Disclosure
Management & Board
Bring in recognizable and reputable
management team and the Board
A well presented strategy is essential to build an attractive
equity story and generate investor interest
Implement systems and procedures to permit effective
monitoring, control and reporting of financial performance
Investor Relations
Establish communication procedures and clear information
messages; set and sustain highest standard of external
communication
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Thank You
Disclaimer: The information/material presented in this report is provided to you for information purposes only and are not to be used
or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. The
information on which this report obtained from sources which Shajar Research believe to be reliable but we do not guarantee that it is
accurate or complete. In particular, the report takes no account of the investment objectives, financial situation and particular needs of
investors who should seek further professional advice or rely upon their own judgment and acumen before making any investment.
Warning: All material presented in this report, unless specifically indicated otherwise, is under copyright to Shajar Captial. None of the
material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without
the prior express written permission of Shajar Capital.
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