Press Release

VIS Reaffirms Preliminary Rating of Proposed Sukuk Issue of Mughal Energy Limited

Karachi, February 26, 2025: VIS Credit Rating Company Limited (VIS) has reaffirmed preliminary rating at 'A+ (plim)' (Single A Plus Preliminary) to the Proposed Sukuk of Mughal Energy Limited (‘’MEL’’ or ‘’the Company’’). The medium to long-term rating of 'A+' denotes good credit quality; protection factors are adequate. Risk factors may vary with possible changes in the economy. Outlook on the assigned rating is ‘Stable’. Previous rating action was announced on July 05, 2024.

Mughal Energy Limited (‘MEL’ or ‘the Company’), a subsidiary of Mughal Iron & Steel Industries Limited (‘MISIL’ or ‘the Sponsor’ or ‘the Holding Company’), was established in August 2012. The Company aims to finance a 36.5MW hybrid-fired power plant through the issuance of a PKR 2,500 million Sukuk. The project is funded through both equity and debt, with a capital structure of 60% debt and 40% equity, covering land, plant, civil works, and IDCs. The estimated cost of the project is PKR 6,500 mln. The project, currently ~50% completed with plant components procured, is spread over four phases: civil works, mechanical installation, testing, and trial runs. The civil works phase began in November 2023 and is set to conclude by October 2024. Mechanical installation commenced in February 2024. The management informed that MEL would achieve the commissioning phase by March 2025, and it is expected that the plant will be operational around April- May 2025.

The proposed Sukuk issuance by MEL seeks to raise PKR 2,500 million. This Medium-Term OTC-listed, privately placed, redeemable, and convertible Islamic certificate has a tenor of four years from the issuance date. A one-year grace period precedes principal repayments, which will be made in six equal semiannual installments beginning 18 months post-issuance. The Sukuk is priced at 6M KIBOR + 150 basis points per annum, with a 12% floor and no cap. Security includes a ranking charge over fixed assets (excluding land and building, including CWIP) with a 25% margin on NBV (PKR 4,661 million as of September 30, 2024), a corporate guarantee from the holding company, and a pledge of sponsors’ shares in MEL (discounted 25% to breakup value), adjusted proportionally with repayments. Proceeds are managed through a Sukuk Payment Account (SPA) receiving monthly inflows from Mughal Iron & Steel Industries Limited. The Sukuk features convertibility triggered by an extraordinary resolution (75% of holders) after 30 months and a call option allowing full redemption after one year, subject to board approval.

Assigned rating is underpinned by the support provided by the Sponsor, with a “full faith” corporate guarantee. MISIL has an established market position and an extensive track record in the long steel industry. With the Sponsor being the sole customer of MEL, rating also incorporates the business risk profile of steel sector, which is considered medium to high due to its exposure to cyclicality and fragmented nature of the competitive landscape. MEL’s performance will be heavily dependent on the operational performance of its sponsor.

Assigned rating also considers the benefits from the project which is expected to assist MISIL in lowering energy costs, supporting profitability, and maintaining adequate coverage levels sufficient to support MEL. The financial risk profile of MISIL reported constraints in FY24, on account of prevalent adverse economic conditions. Ratings take comfort from the Sponsor’s diversified product offerings that mitigate economic cyclicality, with portfolio ranging from high-grade steel for infrastructure projects, which are cyclical and linked to government spending, to low-grade steel for small-scale projects and affordable housing, which are less cyclical. This supported higher volumes, despite an adverse economic environment in FY24 and provided some support to the financial risk profile.

Nevertheless, ratings levels will remain sensitive to MISIL’s ability to improve its financial profile and meet its projected plans as communicated by the management. Furthermore, the rating is underpinned by the proposed sukuk structure and the corporate guarantee provided by the Sponsor, ensuring “full faith” coverage of the Company’s obligations.

For further information on this rating announcement, please contact 021-35311861-64 or email at info@vis.com.pk





Applicable Rating Criteria: Industrial Corporates
https://docs.vis.com.pk/docs/CorporateMethodology.pdf
Applicable Rating Criteria: Rating the Issue
https://docs.vis.com.pk/docs/Rating-the-Issue-Aug-2023
VIS Issue/Issuer Rating Scale
https://docs.vis.com.pk/docs/VISRatingcales.pdf

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