ZKB Construction (Pvt.) Limited ("ZKB Construction" or "the SPV") is a private limited company incorporated under the laws of Pakistan to act as a Special Purpose Vehicle (SPV) for Zahir Khan & Brothers ("ZKB" or "the Firm"). The Firm was established in 1970 and is registered with the Registrar of Firms, Balochistan under the Partnership Act, 1932. The SPV has been established to facilitate the issuance of Shariah-compliant Sukuk Certificates to support the funding requirements of the Firm, primarily for undertaking new projects and financing the working capital needs of ongoing projects. Under the proposed structure, the SPV will extend a financing facility to the Firm using the proceeds raised through the Sukuk issuance, with repayment terms aligned with the obligations under the Sukuk. ZKB operates across a diversified portfolio of infrastructure and construction projects, including roads and highways, bridges, buildings, dams, canals, tunnels, water and irrigation systems, oil and gas pipelines, and industrial infrastructure. The Firm holds a 'CA' category license with a 'No Limit' designation from the Pakistan Engineering Council and maintains an extensive fleet of construction machinery and equipment supported by a permanent workforce and project-based labor.

ZKB Construction (Pvt.) Limited is wholly owned by its parent partnership firm, Zahir Khan & Brothers. The sponsors established the Company with the strategic objective of gradually transitioning the business towards a corporate structure capable of undertaking current and future projects and accessing capital market funding avenues. Given the sponsors' long-term vision and commitment to the business, the ownership structure is expected to remain stable going forward. The sponsoring family possesses extensive experience in the construction sector and maintains strong financial strength supported by substantial asset holdings and properties across Pakistan.

The overall control of ZKB Construction (Pvt.) Limited rests with four partners of Zahir Khan & Brothers, all of whom are actively involved in the management and strategic oversight of the Company. The governance framework mirrors that of the parent firm, with all partners holding executive responsibilities and contributing to operational and business decisions. The sponsors possess significant industry experience, led by Mr. Zahir Khan, the founding partner and CEO, who has nearly five decades of experience in the construction sector. While the existing structure supports effective decision-making and operational oversight, there remains room for further institutionalization through the introduction of formal governance mechanisms and board committees. Financial transparency is supported through external audits conducted by M/s RSM Avais Hyder Liaquat Nauman Chartered Accountants, which expressed an unqualified opinion on the parent firm's FY25 financial statements.

The management of ZKB Construction (Pvt.) Limited is led by Mr. Suleman Khan, who serves as the Chief Executive Officer of the SPV and holds the position of Director at Zahir Khan & Brothers, overseeing projects in the central region. He possesses over 15 years of experience in the construction industry, with expertise in Public-Private Partnership (PPP) projects, hydropower, and water resource developments. He is supported by an experienced management team comprising Mr. Atif Iqbal, Head of Financial Reporting and Accounting, Mr. Kamran, Head of Treasury, and Mr. Omair, Head of Investments, who has extensive banking sector experience. The parent firm maintains a well-defined organizational structure comprising seven key functional departments with clearly delineated responsibilities. The Firm utilizes a customized ERP-based MIS tailored for the construction sector, enabling effective financial and operational monitoring, while established quality control practices and internal control mechanisms support the overall control environment.

Pakistan's construction sector is exhibiting a gradual recovery, supported by improved execution under the Public Sector Development Programme (PSDP) during 1HFY26. Utilization of the federal PSDP allocation reached approximately 21% by end-December 2025, translating into development spending of around PKR 210bln, with transport and communications infrastructure projects accounting for most of expenditures. The sector is expected to benefit from continued investment in infrastructure, urbanization, hydropower developments, CPEC-related projects, and improving macroeconomic conditions over the medium term. The SPV derives its strength and credibility from its parent firm, Zahir Khan & Brothers, an established name in Pakistan's construction industry. The sustainability of the SPV's repayment profile remains closely linked to the operational performance and project execution capabilities of the parent firm, which benefits from a sizeable project pipeline and significant exposure to projects financed by multilateral agencies, providing resilience against political and funding-related uncertainties.

As the SPV does not undertake independent commercial operations, it does not require working capital or generate standalone operating cash flows. The sole purpose of the SPV is to raise funds through Sukuk issuance and extend them to the parent firm through a Shariah-compliant financing facility. To strengthen the repayment profile, the Sukuk is supported by cash flows from selected ongoing projects of the Firm, primarily those financed by multilateral agencies such as the World Bank and ADB, with project timelines aligned to the Sukuk repayment schedule. Seven projects with cumulative expected cash flow realizations of approximately PKR 26bln were initially earmarked for this purpose and are supported through a defined collection and throughput mechanism together with lien-marked operating accounts to ensure ring-fencing of cash flows. The rating was initially assigned to the instrument on 4 July 2025. Since then, management has actively marketed the Sukuk, resulting in soft commitments from investors, with financial institutions constituting the majority of the investor base. Management expects these indicative commitments to be converted into firm commitments, with the proceeds from the Sukuk anticipated to be received during 1QFY27. Given the time elapsed since the initial rating assignment, actual project execution timelines and the associated cash flow realizations have deviated to some extent from the original projections. Nevertheless, management believes that the cash flows from the currently assigned projects remain sufficient to meet the required funding of the Debt Payment Account (DPA) and Debt Service Reserve Account (DSRA), thereby ensuring the timely repayment of the Sukuk. Furthermore, the transaction structure provides the flexibility to assign additional eligible projects to the pledged pool, if required. Since the initial rating, the Firm has secured several new project awards, with additional contracts also expected to be awarded. Should the need arise, the receivables from these eligible projects can be incorporated into the pledged cash flow pool to enhance cash flow coverage, maintain adequate DPA and DSRA funding, and further strengthen the Sukuk repayment mechanism. The SPV was capitalized through an initial equity injection of PKR 0.75bln and plans to issue a PKR 2.5bln Sukuk along with a PKR 0.5bln green shoe option. Given the pass-through nature of the structure, leverage is expected to decline progressively as repayments are received from the Firm in line with the agreed amortization schedule.

The following seven key projects had been identified and earmarked for this purpose:

1. BRT Project Yellow Line

2. Abbottabad Water Supply System - Lot 1

3. Abbottabad Water Treatment Plant - Lot 2

4. Kohat Water Supply System - Lot 3

5. Peshawar Water Supply System - Lot 4

6. Mingora Greater Water Supply Scheme

7. Water Treatment Plant Mingora

The Rating Watch reflects that PACRA's assessment of the projected cash flow sufficiency remains subject to the receipt and review of certain outstanding information from the Client, including supporting project documentation and comments from the financing banks. This information is required to independently validate the cash flow assumptions underpinning the proposed Sukuk structure. Upon completion of its assessment, PACRA will update the rating, if warranted.

The Company is in the process of issuing a Rated, Secured, Privately Placed and subsequently DSLR-listed Islamic Sukuk of up to PKR 3,000mln, inclusive of a green shoe option of PKR 500mln, for a tenor of two years including a grace period of nine months. The Sukuk proceeds will be utilized by the parent firm, Zahir Khan & Brothers, for undertaking new projects as well as meeting the working capital requirements of ongoing projects through a Shariah-compliant financing facility extended by the SPV. The expected profit rate on the Sukuk is anticipated to range between 3M KIBOR plus 2.00% to 2.50% p.a., to be finalized at issuance. Rental payments will be made quarterly, while principal repayments will commence after the expiry of the grace period and continue on a quarterly amortizing basis until maturity.

The Sukuk carries a senior secured position, backed by a first-ranking hypothecation charge over all present and future current and fixed assets (excluding land and buildings) of both the Firm and the Issuer, each supported by the agreed security margin. These first-priority charges materially enhance collateral coverage and ensure that Sukuk holders retain a superior claim over the pledged assets until full redemption of the instrument.

Credit protection is reinforced through multiple structural features, including liens and rights of set-off over the Firm's primary Operating Account, where all project cash flows are received, the Collection Account maintained under the throughput mechanism, and the SPV's Debt Payment Account (DPA) and Debt Service Reserve Account (DSRA). The DSRA shall be maintained at an amount equivalent to one full upcoming installment of principal and profit (P+I), with funding commencing on the 45th day from issuance through an initial contribution equal to one-sixth of the required amount and subsequent top-ups every 45 days to maintain the prescribed threshold throughout the tenor of the instrument. The DPA shall be funded in two tranches during each quarterly cycle, comprising half of the upcoming installment on the 45th day and the remaining half on the 85th day, thereby facilitating timely debt servicing. Additional comfort is provided through personal guarantees of the partners of the Firm, the corporate guarantee of the Firm, and any additional security arrangements that may be required by investors or the Investment Agent.