Bonds That Last

Pakistan: Where To Invest?

The local newspapers have been pretty pleased during the last few months about the launch of the Pakistan Stock Exchange (PSX) - which, in effect, was basically just a renaming of the Islamabad, Lahore & Karachi bourses, but otherwise pretty much meant business as usual. Hopefully, the extensive coverage of the renaming has generated an increase in awareness of the field of stock investment in ordinary Pakistani society, but not much else has actually transpired since the unveiling of the new PSX logo.

The reason for this is the fact that Pakistani investment nature is of the risk-averse variety (translation: the common man already loses so much money to high taxes & higher prices, that he prefers to put his money in financial ventures that aren't likely to bankrupt him with a single unexpected twist of the market). Mostly, this investment temperament means a liking for real estate (both cultivated or constructed), savings accounts & bonds. While real estate is considered the most valuable form of investment, & savings accounts pay a more-or-less respectable interest rate, the most interesting field in Pakistan is the bond market: As far as the common man knows, it is entirely dominated by Government bonds...which pay a pittance; but since there don't seem to be any other options, people just shrug tolerantly & accept whatever they get without question.

Changes: Home & Abroad

The PSX might have come across as the harbinger of positive change...but that possibility crashed & burned when the news broke that the Securities & Exchange Commission of Pakistan (SECP) management had been placidly letting thousands of firms from all over the world list without fulfilling legal requirements such as hiring a full in-house counsel team.

At the same time, Exchange Traded Funds (ETFs) have become quite popular, especially in the American newspapers, for supposedly being reliable forms of investment for the middle-class investor. Simultaneously, several top-tier multinationals have suddenly encountered a series of tragic setbacks that have cost them billions in lost revenues (past, present & future). Some of the most recent affectees of this troubling (& potentially long-term) trend are:

1. American International Group Inc.

An American insurance corporation that provides services in 130 countries (including Pakistan, from its office in Karachi). According to the latest figures (from 2014), it has a revenue of US$64.4 billion, net income of US$7.52 billion & operating income of US$10.5 billion.

2. Baker Hughes

One of the world's largest oil field services companies. According to the latest figures (from 2013), it has a revenue of US$22.364 billion, net income of US$1.096 billion & operating income of US$1.949 billion. While it focuses mainly on the energy sector, it handles a diverse range of businesses, such as the food retailer business it runs in the Pakistani capital, Islamabad.

3. Sirius XM Holdings

An American broadcasting company that provides satellite radio services. According to the latest figures (from 2015), it has a revenue of US$4.6 billion, net income of US$510 million & operating income of US$1.18 billion. While it tries to maintain a modest image, Sirius is actually quite the multinational with its products even available in Pakistan (particularly Karachi).

4. Smith & Wesson

An American weapons manufacturer, particularly firearms & BB guns. According to the latest figures (from 2012, primarily because the weapon sector is rumored to have sustained massive losses in future contracts, leading to most weapons manufacturers adopting a restrained policy of information-sharing), it has a revenue of US$412 million, net income of US$16.1 million & operating income of US$47.1 million.

Pakistan: Alternatives To Government Bonds?

While the highly-respected companies mentioned above are clear evidence that brands are no longer the indicator of success that they were in the simpler times of the past, the Pakistani investor community's marked respect for bond investment means that there is plenty of untapped potential here for companies from countries like Japan; but before any local investor can decide which bond to invest in, he or she must be thoroughly informed of the available varieties. A brief summary of the main types of bonds would be as follows (courtesy investopedia.com):

1. Corporate Bonds

A debt security issued by a corporation & sold to investors. The backing for the bond is usually the payment ability of the company, which is typically money to be earned from future operations. In some cases, the company's physical assets may be used as collateral for bonds.

Corporate bonds are considered higher risk than government bonds. As a result, interest rates are almost always higher, even for top-flight credit quality companies.

2. Convertible Bonds

A convertible bond is a bond that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the bondholder.

Convertibles are sometimes called "CVs."

3. Callable Bonds

A callable bond is a bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called.

Also known as a "redeemable bond."

4. Term Bonds

A term bond refers to bonds from the same issue that share the same maturity dates. Term bonds that have a call feature can be redeemed at an earlier date than the other issued bonds. A call feature, or call provision, is an agreement that bond issuers make with buyers. This agreement is called an "indenture", which is the schedule & the price of redemptions, plus the maturity dates.

5. Amortized Bonds

An amortized bond is a financial certificate that has been reduced in value for records on accounting statements. An amortized bond is one that is treated as an asset, with the discount amount being amortized to interest expense over the life of the bond. If a bond is issued at a discount - that is, offered for sale below its par (face value) - the discount must be treated either as an expense or it can be amortized as an asset.

6. Adjustment Bonds

Issued by a corporation during a restructuring phase, an adjustment bond is given to the bondholders of an outstanding bond issue prior to the restructuring. The debt obligation is consolidated & transferred from the outstanding bond issue to the adjustment bond. This is effectively a recapitalization of the company's outstanding debt obligations, which is accomplished by adjusting the terms (such as interest rates & lengths to maturity) to increase the likelihood that the company will be able to meet its obligations.

7. Junk Bonds

A junk bond is a colloquial term for a high-yield or non-investment grade bond. Junk bonds are fixed-income instruments that carry a rating of 'BB' or lower by Standard & Poor's, or 'Ba' or below by Moody's. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.

8. Angel Bonds

Investment-grade bonds that pay a lower interest rate because of the issuing company's high credit rating. Angel bonds are the opposite of fallen angels, which are bonds that have been given a "junk" rating, & are therefore much more risky.