Karachi October 25 2022: Pakistan Credit Default Swap (CDS) jump 3,071 basis points on Monday to the historic high level of 5,282 basis points, according to data published by Bloomberg.
Pakistan International Sukuk with maturity of December 2023 is trading at 144.72 percent while Pakistan Government International Bond with maturity of April 2024 is trading at yield of 89.73 percent.
Junk bond sales are falling at an unprecedented rate globally as interest rates rise, a double blow to riskier companies in need of financing in the next few years.
“We are so far off everything recorded in the last 10 to 12 years,” said Nick Kraemer, head of ratings performance analytics at S&P Global Ratings. “Companies at some point will have to return to primary markets, but for now the pipeline is still thin and upcoming maturities in the next few months appear to be very limited.”
Issuance stood at US$206.7 billion on Oct. 24 compared with US$775.5 billion at the same time in 2021, according to the Bloomberg data, a fall that surpasses the one recorded during the financial crisis. It comes after a record year for junk-bond issuance last year, with US$878 billion sold globally.
The stark decline shows just how quickly the global economy has taken a turn for the worse, as policy makers have shifted their interest-rate strategy at an unprecedented pace. The market has gone from multiple deals per day last year to weeks now going by without a single high-yield bond being offered.
With more central bank rate hikes likely as inflation shows no signs of slowing down, it makes it even more unlikely that the riskier corners of credit markets will see a rush of deals returning anytime soon.
On October 6 2022, Moody’s Investors Service (“Moody’s”) downgraded the Government of Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa1 from B3. Moody’s has also downgraded the rating for the senior unsecured MTN programme to (P)Caa1 from (P)B3. The outlook remains negative.
While on October 21 2022, Fitch Ratings has downgraded Pakistan’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘CCC+’ from ‘B-‘. Fitch typically does not assign Outlooks to sovereigns with a rating of ‘CCC+’ or below.
The decision of Moody’s to downgrade the ratings to Caa1 is driven by increased government liquidity and external vulnerability risks and higher debt sustainability risks, in the aftermath of devastating floods that hit the country since June 2022. The floods have exacerbated Pakistan’s liquidity and external credit weaknesses and vastly increase social spending needs, while government revenue is severely hit. Debt affordability, a long-standing credit weakness for Pakistan, will remain extremely weak for the foreseeable future. The Caa1 rating reflects Moody’s view that Pakistan will remain highly reliant on financing from multilateral partners and other official sector creditors to meet its debt payments, in the absence of access to market financing at affordable costs. In particular, Moody’s expects that Pakistan’s IMF Extended Fund Facility (EFF) program will remain in place and provide an avenue for financing from the IMF and other multilateral and bilateral partners in the near term.
