The Pakistan Credit Rating Agency Limited
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Muhammad Hassan

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PACRA Places Rating of Ghani Chemical Industries Limited's Sukuk | Feb-17 on 'Rating Watch'

Rating Type Debt Instrument
Action Maintain Downgrade
Long Term A- A-
Short Term - -
Outlook Negative Negative
Rating Watch Yes -

The ratings recognize Ghani Chemical Industries Limited's (Ghani Chemicals) prominent position in the industrial and medical gases sector. The industry largely possesses oligopolistic structure, benefiting the players. Recent slowdown in demand for industrial gases from key sectors, in line with the overall economic slowdown, has kept product prices depressed, reflected in a decline in the Company's margins at gross and operating level. Simultaneous increase in working capital needs on account of slow recovery from customers in the health sector led to higher short-term borrowings, which increased finance cost substantially, resulting in declining profitability. Resultantly, cashflows and coverages have remained under pressure, highlighting financial risk despite moderate leveraging. Ghani Chemicals’ third 110TPD plant has been set up and is expected to commence commercial operations in 2HFY20. The Company has utilized borrowing to make payment for the new plant, exerting further pressure on coverages. Smooth functioning of the new plant and timely generation of incremental cashflows remains critical to the Company’s performance. The sponsors have provided support to the Company for expansion and working capital management in the past.
The ratings are dependent on the Company's ability to effectively utilize enhanced capacities. At the same time, management of financial risk, particularly debt coverages, remains important, wherein any further dilution would have negative implications for the ratings. Sustained market share and, in turn, improved margins would support ratings. Ghani Chemicals' holding company - Ghani Global Holdings Limited - has recently announced that it is planning to divest its stake in the Company, wholly or partially. The final decision regarding this is yet to be announced. Considering the expected change in ownership structure, PACRA has placed the entity ratings of Ghani Gases on ‘Rating Watch'.

About the Entity
Ghani Chemical Industries Limited is an unlisted, public concern, incorporated as a private limited company in Nov-15 and subsequently converted to public status. The Company was established to set up a chemical manufacturing plant in Hattar Economic Zone. However, due to economic and political challenges, the project was postponed. Up till Jul-19, the Company had not started commercial operations. In Jul-19, as part of the Scheme of Compromises, Arrangement and Reconstruction undertaken by the Ghani Global Group of Companies, the manufacturing undertaking of Ghani Global Holdings Limited (formerly “Ghani Gases Limited”), along with all
assets and liabilities, was transferred to Ghani Chemicals. The Company is a subsidiary (~99%) of Ghani Global Holdings Limited which is owned majorly by the Ghani Family (~56%).

About the Instrument
The Company has issued a rated, privately placed and secured Sukuk amounting to PKR 1,300mln on 3rd February 2017. The Sukuk has a maturity of six years. Principal repayment started since May17 with consecutive quarterly installments. The profit repayments are being made on a quarterly basis on the outstanding principal amount on a floating rate of 3M-KIBOR plus 100bps. The Sukuk issue is secured by way of a first parri passu charge over present and future fixed asset of the company inclusive of a 20% margin. As of end-Dec19, the Sukuk has an outstanding balance of ~PKR 704mln and will be fully mature in Feb23.

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.