PACRA Assigns Preliminary Rating to Mughal Energy Limited | PP Sukuk | PKR 2.5bln | TBI

Mughal Energy Limited (MEL) or the Company is a subsidiary of Mughal Iron & Steel Industries Limited (MISIL). MEL is in the process of installing a 36.5MW hybrid captive power plant that will supply electricity majorly to the MISIL. The Company has been granted a generation license by NEPRA of 30 years starting from the COD. The total estimated cost of the project is PKR 6.5bln which will be financed through expected debt to equity mix of ~65:35. The debt financing will be utilized towards installation and testing of the plant for commercial operations. The Company has already procured the plant and land for plant site through equity and debt by the sponsors, thus mitigating the procurement risk. The Company has assigned local contractors for the civil work, installation, fabrication and testing of the plant at the site which will take approximately 14 months which was commenced from Nov’23. The plant is expected to be commissioned in 1QCY25. Further, the off-take risk is mitigated as the long-term PPA has already been signed with MISIL. MISIL has approved issuance of corporate guarantee of PKR 6bln in favor of banks on behalf of MEL for the purpose of availing financing for a period of 5 years.
The current rating captures the group's strengths and business acumen. Moving forward, this rating will be dependent upon timely completion of the project, benefiting the MIISIL in the form of low energy cost and improved margins. During 9MFY24, MISIL faced subdued demand resultantly underscores the financial stress. Therefore, coverages remain sensitive. The assigned rating take comfort from the Sponsor's corporate guarantee, which ensures full coverage of the Company's obligations. Going forward, rating remains crucial to the issuance of proposed sukuk as per defined security structure.

About the Entity
MEL was incorporated as a Public Limited Company in Pakistan on August 29, 2012. MEL is a subsidiary of MISIL and was listed on the GEM Board of the Pakistan Stock Exchange Limited in June 2024. The Chairman of the board is Mr. Mirza Javed Iqbal, who brings extensive experience from the iron and steel industry. Mr. Khurram Javed, the CEO of the Company, has been actively involved in the family business.

About the Instrument
MEL is planning to issue a Long Term Rated, OTC Listed, Privately Placed, Secured Islamic Certificate of PKR 2.5bln inclusive of PKR 1bln Green Shoe Option in July 2024 to finance the Company’s capital investment plan. The Sukuk has a tenor of 3 years (including one year grace period) from the date of issuance. The profit will be paid quarterly in arrears at the rate of 3MK+170bps p.a. The Principal will be repaid in 8 equal quarterly installments starting from the first instalment due at the end of the 15th month after the Issue Date. The security structure of Sukuk which is strengthened by i) First Pari Passu charge on the fixed assets of MEL with the margin of 25%. ii) Corporate Guarantee by MISIL - covering all obligations of the Issuer under the instrument. iii) Exclusive charge & right of set-off on the DPA & DSRA with the Agent Bank. The 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.