VIS assigns preliminary rating of A+ to Agha Steel’s Sukuk

July 10, 2023 (MLN): The VIS Credit Rating Company Limited (VIS) has assigned preliminary instrument ratings to Sukuk of Agha Steel Industries Limited (PSX: AGHA) at "A+" for the long-term with a stable outlook forecast, a latest press release issued by VIS showed.

The medium to long-term rating of ‘A+’ denotes good credit quality with adequate protection factors. Risk factors are considered variable if changes occur in the economy.

AGHA plans to issue a Sukuk of size Rs3.4 billion as a debt swap for the prepayment of the company’s current outstanding Sukuk issue.

The principal shall be paid in equal quarterly installments from the 21st month after issuance.

The proposed issue will be secured by a first pari-passu hypothecation charge over all present and future fixed assets of the company with a margin of 25% as well as a first pari-passu equitable mortgage charge over the company’s rights in immoveable property with a 25% margin.

Additionally, the company will be required to deposit one-third of the upcoming coupon payment each month in a Debt-Service Reserve Account (DSRA).

Moreover, to provide further reassurance to investors of timely payments, any shortfall in the same will necessitate cash equity injections by the company’s sponsors, as per the Sponsor Support Agreement. The assigned ratings are strongly contingent on the unconditional sponsorship backing provided in the aforementioned agreement.

ASIL has outstanding entity ratings of ‘A/A-2’ (Single A/A-Two) with a ‘Negative’ outlook as of December 13, 2022.

The ratings take into consideration the elevated business risk of the steel sector emanating from the country’s deteriorating macroeconomic conditions which have resulted in notable supply side constraints as well as significant demand suppression.

The company’s financial risk profile deterioration reflects the challenging business environment.

Topline performance has declined in line with weakened demand while net margins also decreased further owing to financing and distribution costs despite an uptick in gross margins.

With declining profitability, debt-servicing capacity has been weakened necessitating the new Sukuk issue.

However, capitalization indicators improved on the back of a reduction in short-term debt as slowdown in business activity decreased working capital requirements.

Going forward, recovery in profitability performance and enhancement of cash flows will be critical to ratings.

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