PACRA Assigns Initial Rating to Hub Power Holdings Limited | Sukuk

The rating reflects Hub Power Holdings Limited's ('Hub Power Holdings' or 'the Company') holdco structure with focus on expanding energy generation capacity through indigenous resources. The Company is a wholly owned subsidiary of The Hub Power Company Limited (HUBCO), very strong player in Pakistan's energy sector with a generation capacity of 1,292MWs. The Company has invested in China Hub Power Generation Co. (Pvt.) Ltd. (46%) and ThalNova Power Thar (Pvt.) Ltd. (38.3%), funded through a combination of equity and debt, as per sector's norm. However, the debt was raised at the group level and the Company's capital structure remains equity financed. China Hub Power achieved CoD in Aug-19 and has started receiving generation payments. ThalNova Power has achieved financial close and is expected to achieve CoD in FY22. The Company has a strong financial profile with majority of its commitments as holdco already met for existing portfolio. The Company has issued a Sukuk of PKR 6bln to settle debt at group level. It is fully guaranteed, with a step in right, by HUBCO. The management has projected sizable dividends from China Hub Power. Profit and principle repayments are aligned with these inflows with sufficient cushion in initial years. Materialization of the same is crucial. These can be impacted by surging receivables due to circular debt and government intervention where payment mechanism of power projects is being reviewed. Investment decisions and performance evaluations are undertaken at HUBCO's level, where robust mechanism and governance framework is in place. The same is still evolving at the Company level. The rating take comfort from demonstrated support of sponsors and their strong acumen.
The rating depends on timely materialization of projected cashflows and strictly following agreed parameters for the instrument. Consolidation of investments at holdco level and formalizing effective mechanism for monitoring investment performance will be critical, going forward. Maintaining strong financial profile and creating liquidity cushion remains important. Any significant delay in envisaged cashflows would impact rating negatively.

About the Entity
Hub Power Holdings, a wholly owned subsidiary of HUBCO, was incorporated in 2015 as a public unlisted company under the Companies Ordinance, 1984 (now the Companies Act, 2017). Mr. Khalid Mansoor is the BoD's Chairman and Mr. Ruhail Muhammad is the Company's CEO. The Company's principal activity is to invest in new opportunities in energy sector.

About the Instrument
Hub Power Holdings has issued an unsecured, privately placed, Islamic Certificates ("Sukuk") of PKR 6bln to settle debt at group level. The instrument has a tenor of 5 years (grace period 3 years) and is issued at discount, covering profit payments for the first two years. The differential profit will be settled either through the issuer, in case the interest rate goes down, or through the investor, in case the interest rate goes up, at the end of the discounting period. Thereafter, profit will be payable semi-annually in arrears at the rate of 6M Kibor+250bps. Principle will be paid in 4 equal semi-annual installments. The instrument is fully secured by PR-6 regulation and in addition it's secured by Revolving Cross Corporate Guarantee from HUBCO to make all the principal repayments and profit amounts within 14 days, in the event the Company does not make payment on the due date. HUBCO has a step in right where it requires the investors to sell the Sukuk to HUBCO, payment of which shall be made within 30 days.