PACRA revises the Rating of Khushhali Microfinance Bank Limited | PPTFC | PKR 1.5bln | Jun-22

The Bank issued the PPTFC-Tier I, amounting to PKR 1,500mln to strengthen the capital adequacy in Jun'22. Given the declining CAR, the lock-in clause is being invoked on the Additional Tier-I instrument of the Bank, preventing any debt repayments for the period the said clause remains in place. The unpaid markup payments were due in a) Dec'22 b) Jun'23 c) Dec'23 with the next payment falling in Jun'24. The Bank’s management plan to recapitalize the bank, however, is constrained by the availability of required confirmed approvals of the same. In the absence of equity support or payment guarantee from existing sponsors, the TFCs are mandatorily required to be converted into common equity as per the loss absorbency clause of the investor's agreement. Accordingly, the Bank has converted ADT- I instrument of PKR 1.5 billion into Common Shares of the Bank in accordance with the loss absorbency clause of the ADT -1 of the Investors Agreement. The conversion was approved by the SECP (Securities and Exchange Commission of Pakistan) on July 13, 2023. The conversion was made at a pre-determined price of Rs 60.14 per share of the Bank and 24,941,031 number of shares having face value of Rs 10 per shares amounting to Rs 249,410,310 were issued among the ADT-1 investors. Out of the 10 ADT-1 investors, four investors amounting to Rs 390m, has obtained stay order from the Civil Court, Islamabad at the time of transfer of shares in CDC. The Bank is pursing legal case against the aforesaid investors as it believes the conversion was in accordance with the SBP guidelines and with the approval of SECP.
On the financial profile side, after the conversion of the bond, the paid-up capital of the Bank is standing at PKR 1,889mln at the end of Sept'23 (Dec'22: PKR 1,705mln). The net equity of the
Bank has been eroded to PKR 4,838mln (Dec'22: PKR 8,109mln). The net investment of the Bank stood at PKR 12.11bln (Dec'22: PKR 11.2bln), and net advances clocked at PKR 71.18bln (Dec'22:
PKR 86.1bln). The deposit base declined to PKR 98.8bln (Dec'22: PKR 111.8bln). During 9MCY23, A drop of 28% in Gross income earned by the Bank, which was stood at PKR 4.8bln (SPLY: PKR 6.68bln). The quarter ended with a bottom-line loss of PKR 4.43bln (SPLY: PKR 2.69bln). The CAR of the Bank was below the regulatory limit it drastically dropped to 0.70% at the end Sept'23 from 11.50% at the end Dec'22 (Jun'23: 6.54%) As the instrument is partially converted into equity hence, the rating of the Tier-I instrument is revised to to "C" (Single C).
The strengthening of the capital adequacy as well as the liquidity of the bank is important for the sustenance and review of ratings. Management’s commitment to recouping the asset health and consolidating the Bank's position within the stipulated time is an acute necessity.
The strengthening of the capital adequacy as well as the liquidity of the bank is important for the sustenance and review of ratings. Management’s commitment to recouping the asset health and consolidating the Bank's position within the stipulated time is an acute necessity.

About the Entity
Khushhali Microfinance Bank Limited ("KMBL" or the "Bank") incorporated in 2000 with proclamation of Khushhali Ordinance by Government of Pakistan and subsequently, transformed into a public limited company in 2008. KBML is owned by United Bank Limited (30%), Rural Impulse Fund (24%), Responsibility Global MF (20%), Shore cap II Limited (14%), ASN-NOVIB (10%) and Bank AL-Habib (2%).

About the Instrument
KMBL issued Rated, Privately Placed Listed/DSLR, Unsecured, Subordinated, Tier I Term Finance Certificates of PKR 1,500mln. The instrument is subordinated to the payment of principal and profit to all other claims except common shares.