(a) Is it more usual for the financing needs of these types of corporates to be satisfied out of capital (equity) raisings; retained earnings; or external borrowings?

 

It is more usual for these corporates to resort to external borrowing for their financing needs. However, the State Bank of Pakistan (SBP) Prudential Regulations place a limit on the extent of lending by banks and require that a certain debt-equity ratio be maintained at a prescribed level (presently 60:40 ). Consequently, external borrowing has to be balanced to that extent.

(b) What are the main sources for borrowing for these types of corporates?

 

Commercial banks are the main source for borrowing for these types of corporates. In addition DFIs, Investment Banks, Foreign Lenders such as IFC, ADB, IDB etc. play a role. In some cases borrowings are in the form of lease financing from leasing companies with buy back arrangements, but this constitutes a minor portion of the borrowings.

(c) Is there significant competition among lenders and significant choice of sources for borrowing available to these types of corporates?

 

There is significant competition as there are a large number of commercial banks interested in offering financing especially for what are considered to be blue chip companies. Depending on the repayment period, most lenders (including foreign banks operating in the country) are keen to meet the short term financial needs of the corporates. Local banks and DFIs are open to long term lending and therefore corporates have a sufficient choice of lenders.

(d)What is the present average rate of interest payable in respect of unsecured and secured debt?

 

Unsecured debt is not allowed by the SBP and the interest rate for secured debt depends on the credit rating of the borrower but the average rate varies between 16 to 22% with leasing companies charging upto 25%.

(e) Is finance generally available for long, medium and short-term borrowings?

 

Finance for long and medium term borrowings is usually available only from the public sector banks and DFIs. Private commercial banks prefer short term lending.

(a) What part does the central bank of this economy play in the regulation of the banking and finance sector? Would it intervene or seek to influence the outcome or course of events if, for example a large corporate with debt exposure to a number of banks was in financial difficulty?

 

The SBP plays a regulatory role in the banking and finance sector and in implementing the country's monetary policy. The SBP Prudential Regulations set out the rules for corporate borrowing.Although there is a recent precedent of the SBP intervening in case of an insolvent financial institution (the Mehran Bank) to bail out the depositors but not vice versa , the SBP is not known to have played the role of directly bailing out a borrower in financial difficulty.

(b) Is there any tradition in this economy for a 'main' or 'house' or 'lead' bank to become involved as a chief negotiator or leader in the case of the financial difficulty or insolvency of a large corporate borrower with debt exposure to a number of banks?

 

In the case of syndicate borrowing, the lead bank would theoretically assume the role of leader in negotiating a restructuring etc, however, this is not always the case and the general experience is that each time the lead bank has assumed this role, it has failed and every bank has gone its own way.

(a) Is assessment or analysis of lending risk widely practised in this economy?

 

Yes, assessment or lending risk is widely practised.

(b) If so, does the average lending bank make adequate assessment of risk analysis when contemplating lending to a corporate borrower?

 

All banks are required to make adequate assessment or risk analysis when contemplating lending to a corporate borrower and foreign banks and private sector banks do make adequate risk assessment. However, historically as the bad debt portfolio of public sector banks and DFIs in Pakistan has shown, the assessment by these institutions is not adequate or is deliberately ignored.

(c) Would it be usual or common for a lending bank to regularly monitor the financial performance of a corporate borrower?

 

It is common for a lending bank to monitor the financial performance of a corporate borrower. However the level of monitoring is not necessarily adequate particularly in short term financing.

(d) Would it be usual or common for a lending bank to be regularly supplied with copies of the financial statements of a corporate borrower?

 

The requirement for regular provision of financial statements or information is a standard provision in all agreements for financing as well as being a stipulation of the SBP's Prudential Regulations. However, this requirement is not always strictly complied with in short term financing and also the quality and accuracy of information varies.

(a) Is there a significant source of foreign bank lending in this economy?

 

There is a significant source of foreign lending, but primarily in the public sector. Foreign lending to the private sector is barely 12% of the total foreign debt to Pakistan.

(b) If so, is it usual for this funding to be provided by the foreign bank/s alone or in combination with funding from local or domestic bank/s?

 

Funding by foreign banks is provided both alone and in combination with local or domestic banks. The foreign banks generally concentrate their lending to what are considered blue chip companies.

(c) Are you able to detect whether there are significant differences in approach and funding terms when a foreign bank is involved in the lending (as compared with a purely local or domestic funding)?

 

There is a significant difference in approach when a foreign bank is involved.

(d) If so, what are the main differences?

 

There is much greater due diligence and the financing documentation and evaluation of security is more stringent. Moreover, considerations other than risk factor do not play a role in financing by foreign banks.

(a) Is 'related' or 'exclusive' lending (ie where a corporate borrower and a bank have an established commercial relationship such that only that lender is looked to as the source of borrowing by the corporate borrower) common in this economy?

 

This is rare for large corporates, but not unknown for small and medium sized corporates.

(b) If no, what effect does this have if the corporate borrower is in financial difficulty or is insolvent?

 

All the risk is placed on one institution and a bail out may be more difficult to obtain.

(a) Is 'syndicated' lending (ie where a group of banks or financial institutions join together to provide funding for a corporate borrower) common in this economy?

 

Syndicated lending is known, but only for top rated companies.

(b) If so:

(i) does a lead bank perform the role of 'agent' on behalf of all the lenders; and/or

 

Sometimes a lead bank performs the role of agent on behalf of all the lenders.

(ii) is the concept of a 'trustee' (or similar) for a syndicate of banks (ie where the 'trustee' holds any security for the syndicated funding on trust for the syndicate of banks) known and/or practised in this economy?

 

This concept is prevalent where there are offshore lenders in term finance.

(iii) if the corporate borrower is in financial difficulty or is insolvent what function does the 'agent' or 'trustee' perform?

 

The agent or trustee is expected to regularly monitor the changes in financial position of the borrower in difficulty and in case of the borrower's insolvency may be required to secure and receive assets.

(a) Is the concept known as 'debt subordination' (ie, a contractual arrangement between lenders in which there are 'layers' of 'senior' and 'junior' debt and which has the effect of postponing repayment of the 'junior' debt until payment has been made of the 'senior' debt) recognised and practised in this economy?

 

The concept of debt subordination exists in Pakistan primarily in relation to mortgages and charges.

(b) If so, is debt subordination recognised and/or enforced under the insolvency regime of this economy?

 

Debt subordination is recognised and enforced under the registration of mortgages and charges regime.

(a) Is it permissible for banks to own equity in a corporate borrower?

 

There is no bar on holding of equity by banks.

(b) If so, is it permissible for a bank to convert debt to equity?

 

It is permissible for a bank to convert debt to equity.

(c) Are there instances where this has in fact occurred, particularly in the context of either:

(i) in the context of an 'informal work out' as a result of the insolvency or approaching insolvency of a corporate borrower; or

 

Yes, in a few cases.

(ii) in the context of a formal insolvency administration of a corporate borrower?

 

Not known.

(d) In such a case, is it usual for the bank to be then represented on the management or board of the corporate borrower?

 

Where debt is converted to equity it would be normal for the bank to be represented on the management or board of the corporate borrower.

(a) Is there a market for 'debt trading' (ie, where a bank might sell or trade the debt owed to it by a corporate borrower) in this economy?

 

A market for debt trading does not really exist in Pakistan although in some cases Term Finance Certificates (TFCs) have been quoted on the stock exchange.

(b) If so, is debt trading common in this economy, particularly where the corporate borrower is insolvent or near insolvent?

 

Debt trading is not common in Pakistan and where the corporate borrower is insolvent or near insolvent, debt trading is unknown.

(a) Is the concept of a third party 'guarantee' (as distinct from a security over property) to support corporate borrowing known and practised in this economy?

 

The concept of third party "guarantee" to support corporate borrowing is known and practised in Pakistan.

(b) Is there a law which regulates the power to take or give a guarantee?

 

The power to take or give guarantees is governed by the Contract Act, 1872. The Ordinance also places certain restrictions on the power of a company to give a guarantee (Secs.195 and 208).

(c) Is it common or usual for corporate borrowing to be supported by guarantee/s?

 

Yes, but normally not in the case of blue chip companies or companies having foreign control.

(d) If so, are these guarantees usually taken from owners/directors of the corporate borrower; from other corporates associated with the corporate borrower (eg subsidiaries or holding company); or from unrelated third parties?

 

These guarantees are usually taken from the owners/directors where the corporate debtor is a private limited company and otherwise from either one of these.

(e) Is there a law which regulates the enforcement of guarantees?

 

The enforcement of guarantees is regulated by the Contract Act, 1872.

(f) Is it easy or difficult in practice to enforce guarantee obligations?

 

Guarantee obligations are usually easily enforceable if they are backed by mortgage security.

(g) Is it usual to require that a guarantor should give security over the property of the guarantor as an additional comfort to the lender?

 

Depends on the guarantor. It is uncommon to require this from corporate guarantors with good credit rating but it is common for lesser known companies or where the guarantor is an individual.

(h) Does the insolvency of a corporate borrower have any effect on the enforcement of a guarantee?

 

Enforcement of a guarantee is not affected by the insolvency of a corporate borrower. However, where a winding up order has been passed leave of court will be required for enforcement.