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Sukuk II- the way out from debt-trap?

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November 19, 2019 (MLN): Previously, Power Holding Limited (PHL), the government-owned company, had issued Pakistan Energy Sukuk I which raised around Rs 200 billion to reduce the burden of circular debt faced by Pakistan’s economy. Sukuk I is the largest shariah-compliant financial instrument ever listed on Pakistan Stock Exchange. 

In line with Sukuk I, the issuance of another fresh tranche of Sukuk i.e., Sukuk II worth PKR250 billion has just recently got the green signal from the IMF for raising sovereign guarantees to reduce monster of circular debt of PKR1.6 trillion.

The issuance of the second Islamic bond seems to be a breath of fresh air for the power sector as Sukuk II may help to pay off arrears in the sector which is struggling with the losses. The increase in arrears is subjected to reversal of policies, contraction in revenue, non-payment of hidden subsidies by government and late tariff adjustment.

According to the Fiscal Responsibility and Debt Limitation Act of 2005, the fresh guarantee must not go beyond 2% of the national GDP in any fiscal year, therefore the finance division has retired some small amount of sovereign guarantees for getting the new facility for the power sector.

As per other sources of media, to avoid any technical hitches, the government has made the ground where Auditor General of Pakistan has conducted an audit of PKR200 billion loans recently acquired from Islamic banks and paid to the power sector entities. The buzz is that the interest amount against new loans will be passed on to consumers with high tariff.

It is worth mentioning that IPPs: HUBC, KAPCO, NPL and NCPL’s receivables have reached to PKR262 billion till September’19. It is expected that 25-30% amount will be routing towards IPPs in a new tranche of Sukuk by Dec’19 for easing out the liquidity crunch, as per AKD research. This sector is indebted to a huge amount of money to oil and gas suppliers and other such companies.

Speaking of loss-making FO-based IPPs, Lalpir and Pakgen Power Ltd are likely to remain on a back burner amid upcoming settlement procedure.

Conversely, HUBC and KAPCO are likely to receive PKR 30 billion from energy Sukuk II, higher than from Sukuk I due to higher receivables of PKR225 billion collectively, reported AKD research.

Furthermore, energy payments will also be made to coal-fired and nuclear power plants.

Once the payments are routed to Oil marketing companies, PSO and SNGP on the back of payment for fuel supplies and RLNG through HUBC and KAPCO and Generation companies (Gencos), it will leave some space for payouts for HUBC and KAPCO.

As per the research, the liabilities of HUBC are higher than its peers and therefore, it might use the energy payments to retire short term debts and for capital expenditure. On the other hand, KAPCO might divert the settlement amount towards reducing its level of D/A. The payout potential of KAPCO is still better than HUBC on the account of low payables to PSO and SNGP.

Amongst Nishat IPP, NPL is expected to continue giving dividends as its short-term borrowing is recorded at 35% of receivables as against of 67% for NCPL, revealed AKD research.

Regarding OMC, PSO is the only beneficiary of a circular debt clearance which likely to receive approx PKR45 billion from the second tranche of energy payments, lower than the earlier clearance of PKR60 billion. A substantial amount would go in repayment FE-25 borrowing by 1QCY20. As per AKD research, the left amount will be directed towards planned capital expenditures of the company.

In the light of the small share of PSO in a clearance pie, it is expected that the company would push for late payment surcharge (LPS), resulting in an increase of EPS in FY20F after incorporating LPS. The stock tone suggests that the circular debt clearance fuelled the positive sentiments as the stock has performed 37% from the low of PKR124 per share in Aug’19, revealed AKD research.

More notably, the Prime Minister adviser, Dr Hafeez Shaikh said that circular debt would completely be wiped off by Dec 2020. The question arises, would the power sector get out of the debt-trap? We keep our fingers crossed.

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Posted on: 2019-11-19T10:31:00+05:00