Islamic bankers and treasurers of Islamic financial institutions must be dreaming of a good time since the activity in the Islamic bond market has started picking up after a long pause. Following the successful issuance of Ijara Sukuk by Government of Pakistan, the management of K-Electric is gearing up for the issuance of Ijara Sukuk worth Rs22 billion (including green-shoe option of Rs2 billion). The issue represents nearly 13 percent of companys existing loan book. To recall, the previous Sukuk issuance of Rs6 billion by K-Electric in February 2014 was well-received by investors.
According to media reports, the upcoming issue is subject to regulatory approvals and, therefore, further details on the issue are not on hand at this stage. So lets consider what the issue is likely to bring for the company.
The Shariah-compliant avenues in the market are narrow where demand has already surpassed the supply. This has swayed investors to compromise on the returns. In the latest GoP Ijara Sukuk that was conducted after more than fifteen months, the government was able to raise borrowing at a cut-off discount of 200 bps. Hence, borrowing in Islamic market has become cheaper than to raise borrowing using conventional avenues. By getting a lower rate on its borrowings, the company can effectively bring down its interest costs.
Moreover, it will be able to increase its maturity profile. "Major loans of the company are maturing in 2016 and 2017. Pre-paying these loans with the help of the amount raise through Sukuk issuance will enable the company to improve its maturity profile," said Syed Atif Zafar, a Research Analyst at JS Global. Also, a better maturity profile means that the cash flow position of the firm is likely to stay on the safe side.
With regards to the impact on its debt position, BR Research calculations suggest that its debt to equity ratio will soar to 0.78 times from 0.76 as of March 2014. But with the company pre-paying its long-term borrowings, the debt to equity position of the company is likely to normalise soon.
Further, the financial performance of the company has progressed over the years. Improvement in fleet efficiency, capacity enhancement and gradual decline in transmission and distribution losses have all lent a hand in enabling the company to generate a profit of over Rs6 billion in FY13 from a loss of Rs16 billion in FY08.