Pakistan largest and only vertically integrated utility K-Electric (formerly KESC) held a briefing on Wednesday regarding its upcoming issue of Rs22 billion Sukuk.
The key highlights of the issue included: 1) lower spread of 100bps over 3M KIBOR (3M/6MKIBOR +300bps for retired facilities) keeping interest charges in check, 2) effective refinancing of previous debt load to a longer term duration (expiry date of 1QFY23 as against 1QFY18 for retired debt) and 3) realigning of debt for planned investments compared to smaller tenor issues previously (Azm Sukuk’s of 1, 3 and 5 years).
Having calibrated the debt profile of KEL to include the current Rs22 billion Sukuk issue affirms analysts’ bullish stance where for FY15 financial charges are expected to taper by 16%YoY to Rs9.5 billion. Similarly, weighted average cost of debt is likely to dip to 10.8% following the use of proceeds from the issue to pay-off cost heavy loans from ADB & IFC (Rs18 billion of loans prepaid).
Backed by the above stated facts analysts see the Sukuk issue as being a pertinent catalyst for earnings growth, free cash flow generation and capital enhancement.
Reduced credit risk, resulting from a higher quality credit rating (JCR-VIS rating of AA+ as against AA for AZM Sukuks) through partial securitization of receivables from 495 ‘prime industrial consumers’ under a diminishing Musharaka structure. A move that will reduce the cost of borrowing by allowing KEL to re-finance its debt and take benefit from its strong core receivables profile (Rs2.5 billion/month collection from master collection account of prime consumers, 15% of total monthly collections). A negative covenant, placing an entity level debt service coverage ratio at 30% of EBITDA to total debt is set.
A longer tenor allows KEL to match maturity with outlays, while benefitting from lower underlying rates. By paying off previous, more expensive debt with a shorter duration, KEL manages to hold financial charges lower in the short. The resulting decline in the weighted average cost of debt to 10.8% in FY15E bodes well for valuations.
Reiterating investment case analysts raised following concerns as potential dampeners: 1) on-going legal disputes with NEPRA on calculation of RORA (disputed amount of Rs10.2 billion) and 2) inadvertent slide in the recovery ratio (91.9% in 9MFY15 from 93.0% in 9MFY14).
Conversely, going forward positives include: 1) recovery of up to Rs2.5 billion in receivables from consumers under recent recovery scheme, including additional surcharges firming-up other income and 2) higher than planned reduction in T&D losses (23.4% during 9MFY15 falling by 1.7%YoY). This is likely is to prop up the number of units billed, offering further support to positive stance.
