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Palestine witnessed the issue of its first ever corporate bond in September 2011 when investment firm Padico Holding announced that it would privately place five-year bonds valued at USD 70 million with a group of 14 Palestinian and Jordanian banks.
Padico said it planned to use the proceeds to help finance two investment projects in the West Bank - an entertainment and real estate complex near Jericho, and a USD 300 million new power generation plant in the north of the territory. It said it would use some of the fresh capital to pay down bank loans.
Padico is the largest privately owned company in the Palestinian territories, with subsidiaries and stakes in sectors ranging from telecoms and plastics to hotels and real estate. The group made a net profit of USD 28.76 million in 2011, according to the Zawya Corporate Monitor.
Zawya interviewed Amjad Hassoun, the chief financial officer of Padico Holding, to get more intelligence on the Palestinian bonds market and the company"s plans. Excerpts:
How can you describe the Palestinian corporate bonds market vis-a-vis the government bonds market?
In Palestine, we have a reliable and recognized stock market unlike the bond market, which was for the most part absent. With the issuance of the first corporate bond by Padico Holding on September 15, 2011, an initial step towards establishing a bond market was taken. The Palestinian financial services sector had not previously witnessed the issuance of any form of bonds or other long term financing tools specialized in project financing outside the existing customary bank loans. The bond issuance closed with an oversubscription of USD 85 million, a USD 15 million surplus of the original USD 70 million offering. The oversubscription is a sign of both the market"s readiness for new financing tools, and of the confidence in Padico Holding and its investment strategy. Par value per bond equals USD 10,000, with a minimum subscription of 10 bonds, a five-year maturity rate, and annual fixed interest rate of 5% for the first 30 months, and a variable annual interest for the subsequent 30 months.
As for the government bond market here in Palestine, there has been plenty of discussion by several consecutive cabinets to issue sovereign bonds. The Palestinian government is moving in this direction after the success and stability of the banking system and financial sector in Palestine.
What are the difficulties a Palestinian debt issuer could face?
There are certain factors that a potential debt issuer must consider when operating in Palestine, such as the political and economic conditions, country risk, and the absence of a national currency. Also, the bond market in Palestine is extremely new with Padico Holding being the only current issuer, and therefore the market is not mature yet. This situation, combined with the lack of a platform for trading bonds, limits the ability for the public offering of bonds in the Palestinian market. As a result, Padico Holding offered its bonds through private placement rather than public offering.
How did the initiative of the first ever Palestine bond influence the market?
There was previous reluctance to make such a move considering the market limitations and a historic trend of difficulty in the Palestinian bond market. Nevertheless, we strategically planned well and have been successful, which has now paved the way for others interested in pursuing this financing option in Palestine. For example, there is a potential bond issuance of approximately USD 15 million by APIC (Arab Palestinian Investment Company) which may take place soon. Padico"s initiative in this field has motivated others and will help propel the Palestinian bond market to the next level.
Any new investment tools on the horizon?
Over the past year, Padico Holding has finalized all preparations required to launch the first Palestinian Depositary Receipts (DRs) program, to be traded on the London over-the-counter (OTC) market. The company has already signed an agreement with Bank of New York Mellon appointing it as the depositary bank. It is worth noting that Bank of New York Mellon is considered a leading financial institution in this regard, with its international market share of DR sponsorships exceeding 63%. As part of the preparations, Padico Holding has also coordinated with all relevant official Palestinian entities, including the Palestine Capital Market Authority and the Palestine Exchange.
Launching the first Palestinian DR program is considered a significant step for Padico Holding and for the Palestinian financial services sector in general. This program will enable foreign investors to purchase certificates issued by Bank of New York Mellon in international markets that represent Padico Holding"s shares in the local market. This initiative will attract international institutions and foreign funds to the Palestinian market, and encourage them to look at business opportunities in the region. Furthermore, introducing new investment tools will contribute to promoting the local financial market"s stability and increase trading volume. This program will also help Padico Holding attain wider international coverage, diversifying and expanding its shareholders base, and thereby positively impacting the company"s share price and stability.