PACRA Assigns Preliminary Ratings to ZKB Construction (Pvt.) Limited - PP Sukuk - PKR 3bln - TBI

The ratings factor in the establishment of ZKB Construction (Pvt.) Limited (the "SPV"), created exclusively to facilitate Zahir Khan & Brothers (ZKB), the parent entity, in raising funds through a Shariah-compliant Sukuk issuance. As a partnership firm, ZKB faces limitations in directly accessing capital markets. To address this the SPV, raises funds via Sukuk and channels them to ZKB through a financing agreement. The SPV itself does not conduct any commercial activities or have any independent revenue, cashflow -generating assets. Consequently, its ability to service its debt obligations is entirely reliant on repayments from ZKB, making the parent company’s financial strength and cash flow stability critical to the Sukuk’s credit profile. To support repayment, ZKB has pledged future gross cash flows from seven key infrastructure projects, expected to generate around PKR 26bln over the life of the Sukuk. The projects, backed by credible agencies like the World Bank and ADB, are supported by a structured collection and throughput mechanism. ZKB’s operating and collection accounts are titled in “Firm name”, while the DPA and DSRA are titled in favor of the SPV. All accounts are under lien in favor of the Sukuk holders, with irrevocable instructions ensuring that project revenues flow from operating accounts to the Collection Account. From there, amounts equal to at least one full Sukuk principal and installment are transferred to the DPA and DSRA, which must remain fully funded at all times. Surplus funds may be transferred back to ZKB for commercial use. The structure allows flexibility to add eligible projects if needed, while a throughput multiple peaking at 46x and dropping to 3.2x at maturity ensures sound repayment coverage. Timely realization of cash flows, new awards, and adherence to the repayment schedule are key consideration for the assigned ratings.
The Sukuk is secured through multiple layers: a first charge via hypothecation over all present and future current and fixed assets (excluding land and building) of the AOP and SPV, with a 20% margin; personal guarantees from AOP partners and a corporate guarantee. DPA and DSRA will be maintained by the SPV. The DSRA will be commence getting funded on the 45th day from the day issuance, on which day, 1/6 of the required threshold would be made available and subsequently filled on 45 days basis, while DPA will be funded in two tranches, first tranche (half of total upcoming on the 45th day of the quarterly payment cycle and the second tranche on the 40th day, i.e 85th days of the quarterly payment cycle. A lien without recourse will be placed over the AOP’s operating account, where project cash flows are first deposited, remaining in effect until Sukuk maturity.

About the Entity
ZKB Construction (Pvt.) Limited is a wholly owned subsidiary of "ZKB". The SPV is led by Mr. Suleman Khan, who serves as the CEO. He is supported by experienced management team.

About the Instrument
SPV is in the process of issuing a Rated, Secured, Privately Placed and Subsequently, DSLR listed (listing will be at the issuer/SPV's discretion) Islamic Sukuk of upto PKR 3,000mln (with green shoe option of PKR 500mln) for a period of 2 years. The sukuk issue amount will be utilized by the Firm for the new projects as well as fulfilling the working capital requirements of the existing projects of the Firm. The tentative profit rate on the sukuk is 3M KIBOR + 2.00% to 2.50% p.a, finalized at issuance. The Sukuk includes a 9-month grace period for principal repayment, after which principal payments will be made quarterly until maturity.