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Pakistan Strategy: Energy Sector Circular Debt Second Installment of Rs200bn On Cards

 

• The second instalment of Rs200bn is likely to be released next week to partly resolve circular debt issue in Pakistan wherein its signing ceremony between consortium members of banks is expected today, as per news.
• To recall, Govt. released its first instalment of Rs200bn (~28.5%) in the first week of March 2019 out of circular debt amount of Rs850bn (power sector related payables amounted to Rs1.3tn).
• In the first instalment, the amount of Rs60bn was paid to Pakistan State Oil (PSO) through Hub Power Company (HUBC) and Kot Addu Power Company (KACPO) and other Generation Companies (GENCOs). Overall Independent Power Producers (IPPs) received 23% of their total overdue receivables (presented in below table).
• Meezan Bank Limited (MEBL) is likely to invest Rs70bn at a markup of KIBOR+0.8% in energy Sukuk, as per our channel checks. This will have a positive impact of 2-3% on MEBL’s earnings. This quantum of amount also correlates to the first instalment where the said bank led the consortium and invested Rs88bn.
• We believe a similar formula would be applied where Rs50-60bn will be paid to respective listed IPPs out of Rs200bn instalment. Pakistan State Oil (PSO) is expected to be paid indirectly through KAPCO, HUBCO and GENCOs which can potentially 1) unfold company’s dividend potential, 2) reduce its short term finances and 3) use it to finance its working capital.
• The third round of Sukuk payment (Rs250-270bn) is also under consideration of Govt. to further lower the circular debt amount. We believe NPL, NCPL, KOHE and KAPCO would be in a better position to improve their dividends.