Padico issues first-ever Palestinian corporate bond

Amid new Fatah-Hamas unity pact, sale marks a vote of confidence on future Palestinian state.

311_fayyad picks olives and flags (photo credit: TOVAH LAZAROFF)
311_fayyad picks olives and flags
(photo credit: TOVAH LAZAROFF)
The Palestinian economy passed a major milestone this week with its first-ever corporate bond issue.
Padico Holding, an investment company led by Munib Masri, said on Tuesday it will sell $70 million in bonds in a private placement. The proceeds will be used in infrastructure development projects in the West Bank and Gaza Strip, including a power station planned for the northern West Bank and a tourism and real estate project in Jericho, the company said.
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The bond sale comes as the Palestinian Authority is engaged in a two-pronged effort to create a modern economy in the West Bank and win worldwide recognition for Palestine as an independent country by the United Nations General Assembly. Last week, the two rival Palestinian factions signed a national unity agreement, ending a four-year dispute that left the West Bank under Fatah rule and the Gaza Strip under the control of Hamas.
“This is a new [financial] tool in Palestine,” Masri told The Media Line. “In September, we are going to declare Palestine a state and this will be a nice gift for institutional building. This will definitely give a boost to the economy over the coming four years.”
Boosted by foreign aid and an improved political environment, the West Bank and Gaza Strip economies grew more than 9 percent last year while the Palestine Exchange was alone among Arab stock markets to show a rise in the first quarter of 2011. But the International Monetary Fund said in a report last month that Palestinian growth wasn’t sustainable until private investors are prepared to risk capital. The first Palestinian venture capital fund was launched in April with $29 million in capital.
Masri told The Media Line that he expected most of the issue to be bought by Palestinian banks and other financial institutions, although some foreign investors were likely to subscribe as well to the issue. The bonds, which will not be listed nor traded on the Palestine exchange, will have a term of five year.
They will pay a fixed interest annual interest rate of 5% for the first 30 months and for the remainder of the term pay a variable rate of six-month of the U.S. London interbank offered rate (Libor) plus 2.5 percentage points. Investors will be required to buy a minimum of 10 of the bonds, which are priced at a par value of $10,000, Padico said.
Masri said he isn’t concerned that the PA will lose much of its international aid amid concerns by Israel and the US that money will go to Hamas, an Islamic movement designed a terrorist group by the US and European Union.
“National unity is a great step,” Masri said. “It will encourage investment. We are not worried about the cutting of aid because the [national unity] government will be a very friendly, good government that will [operate] in accordance with international law and United Nations resolutions.”
Padico, which was formed in 1993 shortly after Israel and the Palestinians signed the Oslo peace accords, said the bonds are the best financing option for the company’s medium- and long-term strategic projects. They will provide liquidity without the need to constantly recycle short- term bank loans while enabling it to pay consistent cash dividends.
Masri told a Ramallah press conference on Tuesday that he remained confident in the local economy, although he told The Media Line that economic growth would likely slow to a range of 3% to 4%. Padico intends to invest in Gaza, whose economy lags behind the West Bank due to a blockade imposed by Israel to prevent entry of goods that can be used in hostilities by terrorist forces and damage caused by the 2008-2009’s ground invasion, Operation Cast Lead.
“We plan to open a big, five-star hotel in Gaza, a power plant and many other development projects in Gaza,” he said. “There is a lot to be done in Gaza, especially rebuilding what the Israeli army has destroyed.”
With interests in real estate, finance, industry and energy, Padico posted an operating income of about $55 million from its subsidies on revenue of approximately $110 million. Its 33 holdings include the Palestinian stock exchange and Paltel, the main phone company.
Maher Al-Masri, the chairman of the Palestine Capital Markets Authority, said he hoped the Padico offering would help other Palestinian companies diversify their financing options. “We are hopeful that other competent and solid companies in Palestine will follow suit and issue financial instruments … and will also improve our credit standing as a financial market.,” he said in a statement.