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Issuance of Energy Sukuk II approved by the ECC

As anticipated, the Economic Coordination Committee (ECC) has allowed the raising of PKR200bn from Islamic Banks through the issuance of Sukuks. The consortium will be led by Meezan Bank Limited and will include most of Pakistan’s Islamic and Conventional Banks (via their Islamic Window).

 

The Sukuk issue, coined Pakistan Energy Sukuk II, was initially supposed to be launched back in Jun’19. The issue, however, was delayed due to a sovereign guarantee limit imposed by the IMF in light of Pakistan’s tight fiscal space. The government was later afforded a relaxation on the limit due to a successful completion of IMF’s periodic review.

 

The key purpose of the issue will be to address the cash crunch of Pakistan’s energy chain, which is presently laden with a PKR 1.7tn exposure to circular debt.

 

As with Pakistan Energy Sukuk I, we believe PSO and IPPs will likely emerge as key beneficiaries of the issue. Due to the cash-crunch, most energy players were forced to rely on short-term borrowings to fulfill their working capital requirements.  The influx of cash will likely allow most of the affected companies to reduce their ST liabilities.

 

For IPPs, an improved cash-flow situation significantly enhances their dividend paying capacities. While NPL, NCPL and KAPCO may improve their payouts, HUBC will likely still abstain from paying dividends due to leftover Capex flows for its expansion projects.

 

PSO will likely benefit the most from the Sukuk issue as most of the company’s receivables are exposed to the power sector.  PSO would not only benefit from reduced borrowing requirements, the company would also be able to record late payment surcharges, estimated at PKR 7.7bn (PKR 16.5/sh), due to the expected clearance of the power sector’s receivables.

 

We highlight PSO and HUBC as our top picks in the energy chain as the circular debt resolution has the potential to unlock significant value for both these companies.