PACRA Revises the Rating of Pakistan Services Limited | Sukuk | Mar-18

Pakistan Services Limited (The Company) has a leading position in the hospitality industry. Ever since the pandemic Covid-19, the hotel sector has been under pressure. Furthermore, the slowdown in domestic activity, coupled with hyperinflation, low foreign reserves, a depreciating currency, and a high-interest rate environment impacted the sector's performance. Given the above facts, the operational cashflows did not improve to make timely debt repayments. Over the last couple of months, the management started to acknowledge material uncertainty relating to going concern, which was also affirmed and disclosed by external auditors in published financial statements for the fiscal year ending June 2023. Previously as per the consent and approval of lenders all long-term loans have been restructured, where principal repayments and along with markup for the quarter ended Mar 23, June 23 & Sep 23 were deferred till Dec 23 and became payable with Dec 23 quarter payment. There was no change in the security and pricing structure of these loans, Furthermore, a similar restructuring was also approved by the concerned parties in the second supplemental Musharka Agreement related to PP Sukuk PKR 7,000mln. One of the Agreement clauses ensures the sale of identified fixed assets by not later than 15 December 2023 and failure to do so shall give the trustee an immediate right to enforce and claim the sums under the sponsor’s guarantee. However, management has represented that due to challenging times prevailing in the country and factors beyond the control of entity, i.e., political and economic instability during the last year or so, sale of the sale of the asset could not be materialized within stipulated time, though, the sale is on advance stage and expected to be conclude in near term. This situation casts significant doubt over the repayment capacity of the entity and leads to an immediate revision in credit ratings. During FY23 the topline of the Company depicted ~10% growth and stood at PKR 13,262mln mainly due to price inflation, however, margins showed dilution at all levels, and the company has recorded a net loss of ~PKR 218mln. The Financial risk profile of the Company is characterized by weak coverages and insufficient cashflows.
Ratings are dependent on effective implementation of envisaged strategy, maintaining sufficient cushion for debt repayment and sponsor's support remains crucial. Outlook on the entity is negative while rating watch is maintained. Removal of material uncertainty related to going concern as documented by the external auditors is important.

About the Entity
Pakistan Services Limited was established in 1958 and is quoted on the Pakistan Stock Exchange. It owns and operates Pearl Continental Hotels – the largest hotel chain of the country with 1,702 rooms. Mr. Sadruddin Hashwani is the Chairman of the board. Mr. Murtaza Hashwani acts as the Chief Executive Officer of the Company.

About the Instrument
PSL issued an unlisted, secured, long-term, PP Sukuk amounting to PKR 7,000mln. Under the Regulator’s Relief Package amid COVID-19, the Company availed deferment of the outstanding principal amount of PKR 6.6bln. Consequently, the tenor has been extended to two and a half years. Till Dec'22, seventeen interest payments amounting to ~PKR 2,982mln and principal amounting ~PKR 1,183mln have been paid by the Company. The instrument is secured by an Equitable mortgage on land & building of PC - Lahore with 25% margin.