October 15, 2019 (MLN): VIS Credit Rating Company Limited (VIS) has assigned preliminary rating of AA+ to K-Electric Limited’s (KE) proposed Rs. 25 billion Sukuk.
KE’s long-term entity and Sukuk ratings have been reaffirmed at AA and AA+, respectively. The Company’s short-term ratings have been upgraded from A-1 to ‘A-1+’, given the expected improvement in working capital cycle with the expected increase in consumer end tariff and release of tariff differential claims from GoP post completion of NEPRA verification.
Rating assigned to KE’s outstanding Islamic Commercial Paper has also been upgraded to ‘A-1+’. With the notification and finalization of Multi Year Tariff, Rating Watch- Developing status assigned to the rating has been removed. Outlook on the assigned long-term ratings is ‘Stable’.
The assigned rating recognizes the strategic importance of KE, a vertically integrated power utility company. The exclusivity of distribution rights in its service area i.e. Karachi and adjoining areas of interior Sindh and Baluchistan provides protection from direct competition which is a key rating consideration. Business risk profile draws support from growing demand for electricity and continuous improvement across various operational metrics including reduction in transmission & distribution and aggregate technical and commercial losses. Overall financial profile is projected to remain adequate.
KE plans to issue a Sukuk amounting to Rs. 25 billion to finance ongoing capital and operating expenditures of the company. Tenor of the instrument is 7 years (inclusive of a grace period of 2 years). Ratings to the proposed Sukuk draw strength from the structural features of the instrument. Sizeable and growing cash flows (increased at a CAGR of 13.6% over the last 5 years) that will be routed through the new Master Collection Account is a key rating strength and provides strong coverage for debt payments planned to be undertaken through the MCA.
KE has received fresh public announcement on 30th September 2019 from Shanghai Electric Power of their intention to acquire 66.4% stake in KE. Financial profile and ownership structure of SEP along with expected synergies in various business and operational areas will have positive implications for KE.