PACRA Places Rating of Pakistan Services Limited | Sukuk | Mar-18 on 'Rating Watch - Developing'

The ratings reflect Pakistan Services Limited’s (The Company) position in the hospitality industry as the market leader. Pakistan Services Limited witnessed growth in recent years (in line with Industry dynamics) amid improving security conditions and progression of CPEC with stable margins. However, ongoing geopolitical scenario, coupled with slowdown in domestic economic activity, has impacted the Company's revenues and profitability in FY19. The Company has taken cost control measures to sustain margins. However pressure on the profitability persists as the Company booked a loss in FY19. The Company has modest leveraging and a large asset base. Relatively higher finance cost and low cashflows have resulted in weak coverages. This trend is expected to continue as cashflows may remain suppressed till new properties commence operations. The management intends to dispose of some of its properties (real estate assets) to supplement its liquidity and meet sizeable upcoming debt repayments. The Company’s association with Hashoo Group and sponsors demonstrated track record of support remains a key rating factor. The Company is undertaking several initiatives to improve its cashflows and relieve pressure on liquidity, including sale of certain properties. PACRA has placed the entity ratings of Pakistan Services Limited on ‘Rating Watch – Developing’. The ratings will be reviewed based on materialization of these initiatives.
Ratings are dependent on effective implementation of envisaged strategy to improve cashflows while maintaining modest leveraging and strengthening coverages. Any significant delay in commencement of new projects and/or further deterioration in margins, leading to weak coverages and pressure on liquidity, will have a negative impact on ratings. Meanwhile, maintaining sufficient cushion for debt repayment remains critical.

About the Entity
Pakistan Services Limited was established in 1958 and is quoted on the Pakistan Stock Exchange. It owns and operates Pearl Continental Hotels – the largest hotel chain of the country with 1,526 rooms. Major shareholding lies with Hashoo Group. The Group is one of the leading business conglomerates of Pakistan and has business interests, which span across various sectors both locally and globally.

The Company has a nine member BoD, with one independent member. Mr. Sadruddin Hashwani – founder of the Hashoo Group – is the Chairman of the board. He has experience of over 5 decades of managing different businesses. Mr. Murtaza Hashwani acts as the Chief Executive Officer of the Company.

About the Instrument
Pakistan Services Limited has issued an unlisted, secured, long-term, privately placed Sukuk amounting to PKR 7,000mln (inclusive of green-shoe option of PKR 2,000mln). The bond has a tenor of six years from the date of issue with a grace period of 18 months. The bond is secured with the present and future immovable assets of PC Lahore with 25% margin. Profit rate is payable at 6M-KIBOR + 100 basis points and is to be paid semi-annually in arrears, whereas, principal payment is to be paid in nine semi-annual installments from the expiry of the grace period. The Company issued its first tranche (~PKR 2,333mln) in March 2018, second (~PKR 1,362mln) in July 2018 and the third in January, 2019 (~PKR 3,305mln). Principal repayment will be due in March 2020.