PACRA Revises the Entity Rating of Pakistan Services Limited

The COVID-19 pandemic caused severe global disruptions in the hospitality sector, leading to a prolonged recovery. Companies struggled to manage fixed overheads and service debts amid reduced revenues. Although regulatory loan deferments provided temporary relief, businesses with high debt levels continued to face challenges as restrictions eased. Rising interest rates and inflation further strained cash flows, impacting their ability to meet financial obligations post-deferments. Pakistan Services Limited (PSL) was significantly affected, struggling for nearly two years to keep up with its debt despite a substantial asset base. To manage its debts, PSL sold several non-core key assets, successfully retiring a considerable portion of its debt and accrued interest. Out of total long-term facilities of PKR 15.3bln PKR 8.2bln has been repaid along with interest payments of PKR 10.4bln totaling, PKR 18.6bln. The current outstanding principal against availed facilities stands at PKR 7.1bln, which includes a sukuk instrument of PKR 4.5bln. PSL's non-current assets, valued at PKR 57.7bln, provide substantial coverage. Recognizing the mismatch in cash flows, management initiated a two-phase debt restructuring plan. The first phase met with successive challenges, in offloading the designated assets to raise the requisite cash flows. PACRA has already placed the Sukuk Instrument rating at "D". Given the complexity of restructuring, PSL has engaged Bridge Factor as a financial advisor and is negotiating with banks for a resolution, including clearing overdue payments through planned sales of PC-Multan and investment shares. Management states that the sales are nearing completion, and down payments will cover overdue amounts, with remaining debt aligned to future cash flows. PACRA downgraded PSL's rating to “BBB” in July 2023 and then to “BB” in December 2023. PACRA is now adjusting the entity's rating to “B”, citing high credit risk. The recovery prospects are strong due to significant asset coverage over the outstanding amount. PACRA will monitor and update ratings once the new structure is in place. In FY24, the Company’s revenue grew by 13% to PKR 15bln, driven by improved occupancy and room rates. Margins strengthened, yielding a net profit of PKR 425mln, compared to a net loss of PKR 219mln in FY23.
Going forward, ratings will depend on the successful restructuring of the long-term debt and Sukuk, sufficient liquidity for timely repayment of obligations, and improved coverage. Additionally, resolving the material uncertainty regarding the Company's going concern status, as documented by external auditors, is considered important.

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 in the country with 1,701 rooms. Mr. Sadruddin Hashwani is the Chairman of the board. Subsequent to the period ending March 24, Mr. Murtaza Hashwani resigned from the position of CEO, and Mr. Bastien Paul was appointed as the CEO by the board of directors. He has more than two decades of experience within the hospitality industry.