The Pakistan Credit Rating Agency Limited
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Saadat Mirza

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PACRA Assigns Initial Ratings to Hub Power Company Limited | Privately Placed Short Term Sukuk of PKR 4.5bln

Rating Type Debt Instrument
Action Initial Preliminary
Long Term AA+ AA+
Short Term A1+ A1+
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. 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 of 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 an 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. Currently Hubco has issued two long term and one short term sukuk to meet its working capital needs. Short term sukuk
of PKR 4,500mln was due for repayment in May–21 and, as its replacement Hubco issued another PKR 4,500mln sukuk. 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 the dividend inflows. The cash flows are taking positive benefit for the enhanced capacity payments, emanating from quarterly indexation. Receivables keep surging due to circular debt issue however pressure on cashflows can be eased through an 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.
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. Hubco has recently signed an agreement with Govt. actual impact of the executed agreement is yet to be seen. 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. HUBCO itself is a large RFO based power plant and also holds multiple sizeable investments in the power sector. HUBCO has investments in Sindh Engro Coal Mining Company (SECMC), Narowal Energy Ltd, Laraib Energy, Thar Energy Ltd, Hub Power Services Ltd (HPSL) and through Hub Power Holdings have interest in China Power Hub Generation Company (CPHGC) & ThalNova Power Thar Pvt Ltd. Mega Conglomerate (Pvt.) Ltd (17.3 %) is the single largest shareholder, followed by ABL (7%), Fauji Foundation (8.5%), Jubilee Life Insurance (4.74%) and NBP (3.6%). 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
HUBCO issued unsecured, Privately Placed Short Term Sukuk on 5 May-21, of PKR 4,500mln to finance Company’s working capital requirements. The Privately Placed Short Term Sukuk, having a tenor of six months, carries a profit rate of 6MK + 110bps and will mature on 5 November-21. Interest and principal will be paid in bullet at the time of maturity.

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.