Press Release

VIS Assigns Preliminary Rating to Proposed Sukuk Issue of Mughal Energy Limited

Karachi, July 05, 2024: VIS Credit Rating Company Limited (VIS) assigns preliminary rating of '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’.

MEL, a subsidiary of Mughal Iron & Steel Industries Limited (‘MISIL’ or ‘the Sponsor’), was established in February 2021. The Company is in the process of installing a 36.5MW hybrid-fired power plant. 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. Estimated cost of the project is Rs. 6.5b. The project, currently about 50% completed with plant components procured, is spread over four phases: civil works, mechanical installation, testing, and trial runs. Commercial operations are expected by December 2024. The Company’s sole customer will be its sponsor, which operates in the steel sector of Pakistan.

The proposed sukuk issue by MEL aims to raise Rs. 2.5b, inclusive of a Rs. 1b Green Shoe Option. The Medium Term Rated, OTC Listed, Privately Placed, Secured Islamic Certificate has a tenor of three years from the issue date and offers profit at the rate of 3M KIBOR plus 170 basis points per annum. The Sukuk will have a one-year grace period, followed by principal repayments in eight equal quarterly installments starting at the end of 15th month post-issuance. The issue is secured by first pari passo Hypothecation charge on fixed assets (excluding land and building) along with corporate guarantee by MISIL, covering all obligations of the Issuer under the Instrument as well as exclusive charge & right of set-off on the DPA & DSRA with the Agent Bank. The Debt Service Reserve Account (DSRA) will be funded monthly by depositing into the Collection Account. The deposited amount will ensure that the DSRA balance equals the amount of the next instalment. Once this balance is achieved, no further debits will be made until the beginning of the next profit payment period.. Moreover, 10% of the Issue is to be maintained in an interest bearing DPA with the Agent Bank

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 intrinsic 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. However, MISIL faced financial constraints in FY23 and FY24 stemming from macroeconomic pressures such as floods, inflation, currency depreciation, and policy rate fluctuations, MISIL maintained operational stability mainly through intermittent price adjustments during the period. However, subdued demand in 9MFY24 underscores financial stress. Therefore, coverage levels will remain sensitive to the Sponsor’s ability to meet its projected plans.

Going forward, rating will remain sensitive to the implementation of the proposed sukuk structure and will be underpinned by the “full faith” coverage of the Company’s obligation by the corporate guarantee provided by the Sponsor. Moreover, timely execution of projected plans will also be an important consideration for future review.

For further information on this ratings announcement, please contact at 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/VISRatingScales.pdf

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited (VIS) does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS , the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2024 VIS Credit Rating Company Limited . All rights reserved. Contents may be used by news media with credit to VIS .