The Pakistan Credit Rating Agency Limited
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Faizan Arif

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PACRA Assigns Initial Rating to Hub Power Company Limited | Privately Placed Sukuk of PKR 7bln

Rating Type Debt Instrument
Action Initial Preliminary
Long Term AA+ AA+
Short Term - -
Outlook Stable Stable
Rating Watch - -

The rating reflects the holding company character of Hubco with an exclusive focus on the different dimension of the energy sector. In addition to the investment book, Hubco itself is a large RFO based power plant. Hubco aims to expand generation capacity to boost the country's power generation by utilizing Pakistan's indigenous natural resources. Hubco is setting up new coal power plants (i) China Power Hub Generation Company (CPHGC): 2x660MW coal fired power plant at Hub, (ii) Thar Energy Limited (TEL): 330MW mine-mouth coal fired power plant at Thar and (iii) Thalnova Power: 330MW mine-mouth coal fired power plant at Thar. CPHGC is being developed under a joint venture with China Power International Holdings Limited (CPIHL). Hubco also has investment in Sindh Engro Coal Mining Company (SECMC). These investments are being funded through a mix of short term and long term debt. The proportion of debt in the funding plan is predominant when compared to fresh equity. Fresh equity of PKR 7bln via right issue is just around the corner. Hubco has working capital related borrowing as well. The overall debt quantum in the wake of fresh investment is huge. The cash flows of the company can sustain the burden, which will be complemented by expected dividend inflows.The cash flows are taking positive benefit for the enhanced capacity payments, emanating from quarterly indexation. The management has forecasted sizable net cash position,reflecting dividend inflow from subsidiaries; materialization of same is crucial. Hubco pays dividend, which in an eventuality is an available resource, as evidenced by recent history. Hubco has used short term debt instruments and intends to raise borrowing through privately placed sukuk. These streams are already accounted for in the funding plan.
Cash flow streams of Hubco's plants are guaranteed by GoP under the Power Purchase Agreement (PPA), subject to adherence to the agreed upon performance benchmarks; this provides comfort to the ratings. Timely completion of new projects, settlement of receivable and payable and maintaining healthy debt service coverages are important.

About the Entity
Hubco, a listed company, was incorporated in 1991. Mega Conglomerate (Pvt.) Ltd (19.4 %) is the single largest shareholder, followed by ABL (9.7%), Fauji Foundation (8.5%) and NBP (5%). Hubco holds 100% stake in Narowal Energy Ltd which operates a 225MW capacity oil-fired power plant at Narowal. The BoD comprises eleven-members including the CEO of Hubco. BoD includes three representatives from Mega Conglomerate. Mr. Khalid Mansoor, the CEO, carries over three decades of experience in Energy & Petrochemical sectors in leading roles. He is supported by a team of experienced professionals.

About the Instrument
After PKR 12bln issued from three short term Sukuks in March 2019, April 2019 and May 2019. Hubco has issued a long term privately placed Islamic/Conventional certificates (Sukuk) of PKR 7,000mln to partially finance the equity investment of Hubco in growth projects. The privately placed sukuk, having a tenor of four years, carries a profit rate of 3MK + 190bps. It has a grace period of two years. Furthermore, the instrument is backed by corporate guarantee from NEL for its repayment. The redemption will commence from the third year of the issue date in four equal principal installments and shall continue till the maturity of the instrument.

The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security's market price or suitability for a particular investor.