ISLAMABAD: With total circular debt close to Rs1.7 trillion, the government is considering to introduce swap bonds to re-profile short- and medium-term payables into long-term coupons having up to 25 years of maturity.

The proposal has come from leading businessman Mian Mohammad Mansha who had a meeting with Finance Adviser Dr Abdul Hafeez Shaikh here on Thursday. Another power sector player, Shahzad Saleem, was also part of the meeting attended by Secretary Finance Naveed Kamran Baloch, State Bank of Pakistan Governor Dr Reza Baqir, Federal Board of Revenue Chairman Shabbar Zaidi and Special Secretary Finance Omar Hamid Khan.

Mansha is a key player in the sector with interests in at least four independent power producers (IPPs) and a leading shareholder in MCB.

Informed sources said the businessman gave a presentation to the participants to re-profile the circular debt that was mostly payable at present on short-term basis (fresh flow) and the medium-term (stock of circular debt parked with Power Holding Private Ltd - PHPL). The government team was proposed that the flows and existing bonds could be extended to 25 years through bond swap at relatively higher returns.

This should ease immediate payment problems and the need for issuance of sovereign guarantees. The bond swap proposal is in addition to an ongoing exercise to raise about Rs200bn worth of Sukuk from local commercial banks.

The government had launched Rs200bn Sukuk for the power sector at Kibor plus 80 basis points when Kibor rate ranged 10-12pc and has now reached 12-13 per cent. The proposed long-term swap would need relatively higher return while the authorities expect long-term coupons to result in a better yield curve.

An official statement said Shaikh presided over a meeting on outstanding payables to IPPs and the planned launch of Sukuk and swap. Various recommendations aimed at reducing the circular debt, payments to IPPs and launch of swap were also discussed.

Since there was no representation from the Ministry of Energy, it was decided that all matters including debt and bond swapping should be examined in detail in consultation with the Power Division and consensus proposals should be finalised for consideration of the Economic Coordination Committee (ECC) of the Cabinet within two weeks.

While the proposals are yet to be finally crystallised, bond swaps generally provide any opportunity to both parties to exchange future cash flows like interest payments. An investor can sell an existing bond and purchase another with proceeds to follow in future.

Officials said the country’s total circular debt was currently inching up towards Rs1.7tr with active circular debt in excess of Rs860bn as of September end. There is another debt stock of about Rs812bn being financed through various surcharges in the consumer tariff.

The power sector authorities and a visiting mission of the International Monetary Fund (IMF) are currently in the process of reconciliation of circular debt. The current government raised Rs200bn through Sukuk in the name of PHPL — an asset-less, state-owned shell entity – in March and another similar transaction is held up because of IMF’s restriction on government’s sovereign guarantees.

The stock of these guarantees stands at around Rs1.6tr and should not go beyond this until June next year under the bailout programme. The government is currently negotiating this limit to be relaxed.

The government had created a special desk at SBP for coordinating tasks with banks participating in the transaction, mainly for maintaining accounts and ensuring seamless repayments. The consortium was led by Meezan Islamic Bank and comprises Bank Islami, Faysal Bank, MCB Islamic, Dubai Islamic and Al-Baraka.

The financing had been declared statutory liquidity ratio eligible by the government and SBP. The assets, belonging to a number of public sector power companies, will remain mortgaged in favour of the financiers and the bond is backed by a government guarantee with a 10-year maturity at a rental return of Kibor plus 80 basis points, involving half-yearly rental repayments.

Published in Dawn, November 1st, 2019