ISLAMABAD: The government and a consortium of Islamic banks agreed on Thursday to launch a bond of Rs200 billion, called the Pakistan Musharqa Sukuk, latest by the middle of January to support the power sector entities facing cash constraints due to chronic circular debt.

Finance Minister Asad Umar presided over a meeting at which government officials discussed the bond’s launch with senior representatives of various Islamic banks that would be providing funds to the Power Holding Pvt Limited (PHPL), an asset-less and state-owned shell entity. Power Minister Omar Ayub Khan was present on the occasion.

The representatives of the Islamic banks briefed the meeting about the progress made regarding the launch of the sukuk and reported that “most of the spadework has already been completed” and only some minor irritants needed to be removed, an official statement said.

Sources said the consortium members requested the government to create a special desk at the State Bank of Pakistan (SBP) for coordinating tasks with the banks participating in the transaction, mainly for maintaining accounts and ensuring seamless repayments.

Most of the spadework already done, says official statement

Mr Umar praised the support being extended by the banks and assured them of all-out support for the proposed launch of the Islamic sukuk aimed to generate sufficient funds to ease the liquidity crisis being faced by the power sector.

The two sides have already finalised the mechanism for the launch of the bond in consultation with the power, petroleum, finance and law divisions and the Securities and Exchange Commission of Pakistan.

The consortium is led by the Meezan Islamic Bank and also comprises Bank Islamic Pakistan, Faysal Bank Limited, MCB Islamic Bank, Dubai Islamic Bank and Al-Baraka Bank.

The financing will be declared statutory liquidity ratio eligible by the government and the SBP. The assets will remain mortgaged in favour of the financiers and the bond will be backed by a government guarantee.

The bond will have a 10-year maturity at a rental return of a base rate plus a margin of 100 basis points and the Takaful cost. The base rate will be defined as six-month Karachi Interbank Offered Rate (Kibor) ask side prevailing on the base rate setting date, subject to a floor and cap.

The bond will entail half-yearly rental repayments from the date of drawdown and repayment will be made directly by the central bank on the basis of a budgetary allocation by the finance ministry.

The finance ministry will issue standing instructions to direct debit for return and maturity repayment at the SBP counter.

The funds will be used to service payables of the oil and gas sector that is beset with a circular debt of more than Rs1.3 trillion, including a fresh flow of about Rs700bn. The government has already built up the Syndicated Term Finance Facilities of Rs607.03bn in the name of PHPL for funding repayment liabilities of the distribution companies (Discos). The conventional banks are not ready to commit more funds to the sector.

To deliver on this, all the boards of directors of Discos and generating companies will pledge the properties/assets in the trust for banks.

Published in Dawn, December 21st, 2018