Power Holding Limited (PHL), a public sector entity fully owned by the Ministry of Energy, is issuing a debt instrument to address the liquidity constraints being faced by Pakistan’s power sector.
This is the first ever debt issuance through book building in the history of Pakistan Stock Exchange (PSX) and represents an important milestone. The local bourse is playing a key role in helping the government overcome one of its biggest economic challenges, power sector circular debt.
Pakistan Energy Sukuk-II (PES-II) is a Government of Pakistan (GoP) guaranteed Shariah compliant security of Rs200 billion which is 100% SLR eligible, having a 10-year maturity with semi-annual profit payment for investors. This is the second issue of the Energy Sukuk by PHL, where GoP has decided to issue the instrument through the local bourse to ensure transparency and competitive bidding.
PSX offers a state-of-the-art, book building mechanism which is being used to determine the Cut-off Spread (-/+) in basis points (bps) over the 6 month Kibor rate that the issuer will pay on semi-annual basis to successful investors. The total issue size will be offered through private placement to eligible investors, followed by a technical listing of the Sukuk at PSX.
In this regard, Farrukh H. Khan, MD PSX stated, “This Sukuk issue through PSX state-of-the-art book building system is a watershed moment in the development of the debt market in Pakistan. GoP, Ministry of Finance and Securities & Exchange Commission of Pakistan (SECP) are focused on developing the capital market and this is an important step in that direction. We thank them for their support and are grateful that they have taken this important step.”
Discussing the process and benefits he stated, “Pakistan is finally following the globally accepted best practice of using a book building methodology to raise debt, which benefits both issuers and investors by bringing transparency and price discovery to the center of the debt raising process. The book building process through the Stock Exchange will benefit the issuer in that it will enable price and demand discovery. Furthermore, it will give access to a wide investor base which will enhance liquidity and secondary market trading.”
Unlike the Sukuk issuance by PHL last year, investors who can participate in this issue include banks, financial institutions, companies or corporate bodies, mutual funds, voluntary pension schemes, private funds being managed by NBFC’s, insurance companies, securities brokers, funds and trusts and Individual Investors having net assets of at least Rs2 million.
By widening the scope of potential investors, the issuer will benefit as it increases the likelihood of more accurate price discovery, while a larger group of investors will benefit from this investment opportunity. Given that it is a GoP backed security, such an issuance is generally considered risk free and provides stable returns in the long run.
After the security is listed, investors throughout Pakistan and living abroad can buy or sell units of the Sukuk at the PSX BATS trading platform through their broker. This will provide liquidity and investors will be able to buy or sell the Sukuk in line with their investment objectives. In the long run, having a larger investor base will help the government to successfully raise funds from the market at the most competitive rates.
It may also be recalled that in October 2019 PSX had listed Rs200 billion Energy Sukuk I. Trading in the said debt security commenced on 25th October. This Sukuk was an asset based Shariah compliant government debt security issued by PHL.
Even at that time it was said that the listing of the Sukuk would not only help increase investor confidence in the market but will also help the financial position of the government as well as the energy sector of the country. It was termed a step to alleviate the large circular debt in the energy sector.
At that time Omar Ayub Khan, Energy Minister has informed that the circular debt amounted to Rs450 billion as of May, 2019. He has also said that not only this Sukuk would go a long way in reducing the circular debt, but will also ease the pressure on the power companies in terms of their liquidity issues. The funds raised from this security will help the government in meeting its financial needs to an extent as well.
In Energy Sukuk I, individual investors were also allowed to invest in accordance with Pakistan Energy Sukuk Rules 2019. The trade of the said debt instrument took place through PSX’s Bonds Automated Trading System. Settlement of the bonds was allowed on T+1 basis through National Clearing Company of Pakistan Limited (NCCPL).
The face value of the Sukuk is Rs 5,000 with tenure of 10 years. The rate of return/rental payment is six months Kibor + 0.8% per annum paid semi-annually in arrears. As an incentive to investors, in case the return/rental/profit was not paid within 30 calendar days of the profit payment date, the issuer had to pay an additional amount calculated at 0.12% per annum to the investors (as Charity or under any other Shariah compliant mechanism).
The issue was subscribed by eight banks amounting to Rs200 billion. These banks, including the lead arrangers include Meezan Bank, Faysal Bank, BankIslami Pakistan, Dubai Islamic Bank Pakistan, MCB Islamic Bank, Al Baraka Bank Pakistan, United Bank and National Bank of Pakistan.