Press Release

JCR-VIS Assigns initial Ratings to Power Cement Limited

Karachi, July 10, 2017: JCR-VIS Credit Rating Company Ltd. (JCR-VIS) has assigned initial entity ratings of A-/A-2 (Single A Minus/A-Two) to Power Cement Limited (PCL). Outlook on the assigned ratings is ‘Stable’. JCR-VIS has also assigned preliminary bank loan rating (blr) of ‘A (blr)’ (Single A (blr)) to PCL’s secured bank loan facility obtained to fund Line 3 expansion of 7,700 Tonnes per day.

PCL is currently operating with Line 1 and Line 2 with a rated capacity of 0.9m Tonnes per annum and is in the process of adding Line 3 with a capacity of 2.5m Tonnes per annum. Resultantly, overall capacity is projected to increase to 3.4m Tonnes per annum.

The assigned ratings to PCL are underpinned by financial profile and demonstrated support of parent entity and sponsor family. Such support as outlined below adequately addresses the project risks related to cost and time overruns. Ratings are, however, dependent upon demand patterns synchronizing with substantial supply side dynamics, going forward.

Local dispatches have witnessed healthy growth over the last two years. Higher growth in local industry dispatches has been partly offset by decline in exports resulting in lower than anticipated industry growth during 11MFY17. The growing cement demand in Pakistan is expected to gain momentum with the advent of China Pakistan Economic Corridor and its corollary projects. Accordingly, planned capacity expansion in the South zone is expected to double its existing capacity, going forward. Additional capacities may pose a risk but industry players anticipate growth in domestic demand to largely absorb additional capacities over time.

With the addition of Line 3, the company will be the second largest player in the South zone in terms of installed capacity. Rationale for Line 3 expansion includes catering to increasing demand, enhancing market share and improved profitability & cash flows given the designed higher efficiency of Line 3 vis-à-vis existing plants. With the completion of line 3, dispatches and gross margins are projected to increase significantly. Debt servicing is projected to remain adequate under realistic stress test scenarios. Key risk to timely debt servicing includes lower than projected growth in demand resulting in greater than anticipated competition leading to lower margins in the industry.

Investment cost of Line 3 is estimated at Rs. 25b; around two-thirds of which is being financed through debt while the rest of the funding is being raised via equity. Total term of the loan will be 8.5 years (inclusive of grace period of 2.5 years). The expansion is expected to go live in June-2019 with repayment of principal commencing from June-2020. Ratings also draw support from the following structural features of the Project Finance debt facility:

· Project Cost Overrun Support: Corporate and Personal guarantees of the key sponsors for funding cost overruns during construction, upon first demand from lenders. The project cost overrun support shall be uncapped.
· Debt Payment Shortfall Support: Available for the first 2 years of expanded plant’s operations, for the local currency portion (three-fourths of the facility amount) of the total facility. The remaining, foreign currency portion (25%) of the facility will be guaranteed for the entire debt tenor.
· Devaluation & Contingency Buffer to the tune of Rs. 1.9b is incorporated in the project cost.
· Formation of a Debt Payment Account (DPA) such that the balance in the DPA will be equal to the total semi-annual debt installment seven days prior to each due date. Moreover, sponsors will have the option to provide an SBLC, as an alternate risk mitigating item for the Lenders, if required.

For further information on this rating announcement, please contact the undersigned (Ext: 201) at 021-35311861-71 or fax to 021-35311872-3.

Javed Callea

Applicable Criteria: Bank Loan Ratings (December 2011)
Industrial Corporates (October 2003)

Information herein was obtained from sources believed to be accurate and reliable; however, VIS Credit Rating Company Limited VIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.VIS, the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the rating(s)/ranking(s) mentioned in this report.VIS is not an NRSRO and its credit ratings are not NRSRO credit ratings.VIS is paid a fee for most rating assignments. This rating/ranking is an opinion and is not a recommendation to buy or sell any securities. Copyright 2017 VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to VIS.

JCR-VIS Credit Rating Company Limited