Power Holding Limited (PHL), a public sector entity fully owned by the Ministry of Energy, is issuing a debt-instrument of Rs. 200 billion to address the liquidity constraints being faced by Pakistan’s power sector. This will be the first-ever debt issuance through book building in PSX’s history and represents an important milestone.
The local bourse is playing a key role in helping the government overcome one of its biggest economic challenges i.e. power sector circular debt.
Pakistan Energy Sukuk-II
Pakistan Energy Sukuk-II (PES-II) is a GOP guaranteed Shariah-compliant security of Rs. 200 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.
The government of Pakistan decided to issue the debt through the Pakistan Stock Exchange to ensure transparency and competitive bidding. PSX offers a state of the art, book building mechanism which will be used to determine the Cut-off Spread (-/+) in basis points (bps) over the 6 month Kibor rate that the issuer will pay on a 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 on PSX.
In this regard, Farrukh H Khan, MD PSX stated,
This Sukuk issue on PSX through the state of the art book building system is a watershed moment in the development in the debt market in Pakistan. The Government, Finance Ministry, and 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.
Who Can Invest in PES-II?
Unlike the Sukuk issuance by PHL last year, investors who can participate in this issue include banks, financial institutions, companies or corporate bodies (as per Companies Act 2017), mutual funds, voluntary pension schemes, private funds being managed by NBFC’s, insurance companies, securities brokers, funds and trusts (as defined in the Employees Contributory funds), and individual investors having net assets of at least Rs. 2 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 government-backed security, such issuance is generally considered risk free and provides stable returns in the long run.
After the security is listed, investors throughout Pakistan and abroad can buy or sell units of the Sukuk on 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.