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The Pakistan Credit Rating Agency Limited
Press Release

Date
13-Feb-20

Analyst
Saadat Mirza
saadat.mirza@pacra.com
+92-42-35869504
www.pacra.com

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PACRA Assigns Preliminary Ratings to Hub Power Company Limited | Privately Placed Sukuk of PKR 5bln

Rating Type Debt Instrument
Current
(13-Feb-20)
Action Preliminary
Long Term AA+
Short Term -
Outlook 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. China Power Hub Generation Company (CPHGC) - A joint venture with China Power International Holdings Limited (CPIHL): 2x660MW coal fired power plant at Hub achieved COD as on 17 August 2019. This is indeed a crucial development. Hubco is setting up two more coal power plants (i) Thar Energy Limited (TEL): 330MW mine-mouth coal fired power plant at Thar and (ii) Thalnova Power: 330MW mine-mouth coal fired power plant at Thar. 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 and Hubco has already deployed a sizeable fund in its ongoing projects of Thalnova and Thar Energy Ltd. Hubco has working capital related borrowing as well. Hubco is redesigning its loan book by issuing Long Term Sukuk of PKR 5bln, which is effectively a replacement of an earlier CP Sukuk of PKR 5bln due in Mar-20, with Grace Period of two years. 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. Receivables keep surging due to circular debt issue however pressure on cashflows can be eased through early settlement of receivables. Hubco has used short term debt instruments and privately placed short term sukuk to meet its working capital requirement for some time now and meeting its obligations regarding repayment of principal and interest. 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 (19.5 %) is the single largest shareholder, followed by ABL (8.95%), Fauji Foundation (8.5%) and NBP (3.6%). Hubco holds 100% stake in Narowal Energy Ltd which operates a 225MW capacity oilfired power plant at Narowal. The BoD comprises eleven-members including the CEO of Hubco. BoD includes three representatives from Mega Conglomerate.

About the Instrument
Hubco is in a process of issuing Rated, Secured, Privately Placed, Islamic Certificates issued as Instrument of Redeemable Capital under Section 66 of the Companies Act, 2017, and as conferred in Pakistan Stock Exchange’s Privately Placed Debt Securities Listing Regulations, 2018, Sukuk (Privately Placed) Regulations, 2017 and Private Placement of Securities Rules, 2017 of PKR 5,000mln to finance Company’s working capital requirements. The Privately Placed Long Term Sukuk, having a tenor of four years, carries a profit rate of 1 Year Kibor + 190bps. Interest will be paid semi-annually and principal will be paid in 4 equal semi-annual installments (with two years of Grace Period) starting from 30th month of issuance date.

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.