Ratings Insight-Front Cover-Aug11 · 2012-03-14 · Nishat Chunian Power (Power) AA AA- 1 April 6, 2011 - The upgrade came as the company successfully began commercial operations

J

June 2011

INSIDE……..

PACRA’S RATINGS UNIVERSE

A consistent increase in size even as credit quality remains under scrutiny…

2

PAKISTAN’S RATINGS UNIVERSE

Potential untapped…. 13

The Economic Backdrop

Macroeconomic imbalances challenge policymakers….

14

THE INDUSTRY VIEW

Risk for different economic sectors on the rise as operating environment remains tough….

15

PACRA Insight

Ratings Insight is a medium to communicates with the users of ratings

– harmonizing knowledge; assimilating expertise….in essence, leading the rating

industry’s development along high standards of integrity and transparency

The Pakistan Credit Rating Agency Limited

RATINGS INSIGHT

RATINGS INSIGHT Page 1 of 17 September, 2011 www.pacra.com

LIST OF ILLUSTRATIONS Figure I SNAPSHOT: PACRA Ratings

Composition

Figure II SNAPSHOT: PACRA Ratings Universe Growth

Figure III PACRA Entity Ratings Composition & Growth

Figure IV Entity Rating Activity across Rating Categories

Figure V PACRA Instrument Rating Universe Composition & Growth

Figure VI Instrument Rating Activity across Rating Categories

Figure VII Fall in Credit Quality (PACRA Defaulted Entity Ratings)

Figure VIII PACRA Asset Manager Ratings Composition & Growth

Figure XI PACRA Capital Protected Ratings Composition & Growth

Figure X PACRA Fund Stability Ratings Composition & Growth

Figure XI PACRA Mutual Fund Rankings Composition & Growth

Figure XII Pakistan Entity Ratings Universe Growth

Figure XIII Pakistan Entity Ratings Universe Composition in Rating Categories

Figure XIV Private Sector “Crowded Out”

Figure XV Monetary Tightening increasing borrowing costs

�

EXECUTIVE SUMMARY

Communication..………….reflecting upon issues…putting thoughts into ideas…ideas into words…..RATINGS INSIGHT – a medium to communicate with the users of ratings ‐ is an endeavor undertaken by pacra to facilitate and harmonize the development of ratings business. The matter taken up in ratings insight are diverse – trends and activity in the rating universe, the economic environment and issues and concerns regarding credit quality. In this issue of RATINGS INSIGHT, PACRA’s rating universe is presented in snapshot and the agency’s rating actions discussed in detail. The ratings industry in Pakistan comprises two players. Pakistan rating universe is shown in snapshot. There is insight into the falling credit quality. The economic environment is the backdrop providing a contextual framework for variations in credit ratings and their direction. The shape taken by the macro forces in the economy during the six‐months ending June 30, 2011 is reviewed. An economy beseeched by stagflation (slow growth coupled with rising inflation) is seen challenging the wits of policy makers and suppressing credit quality throughout. RATINGS INSIGHT concludes by presenting an industry view into eight sectors of the economy – banking, insurance, fertilizer, oil & gas, power, cement, textiles and asset manager companies.

ABOUT PACRA’S RATINGS INSIGHT

PACRA carries the onus of being the first credit rating agency in Pakistan. As such, facilitating the development of the rating industry is a natural extension of all PACRA endeavors. PACRA’s Ratings Insight is simply another step in the same direction.

PACRA’s Ratings Insight is a medium furnishing a view on developments in Pakistan’s Ratings Industry. Employing it, PACRA, on a regular, periodic basis, communicates with the users of the ratings – investors, lenders, regulators, and other stakeholders. The matters taken up therein are diverse – including but not limited to ratings universe activity, credit quality trends and the factors responsible, industry risk, and the economy.


RATINGS INSIGHT


PACRA’S RATINGS UNIVERSE

PACRA Ratings Universe comprises a diverse range of opinions - entity and instrument ratings, mutual fund ratings and rankings and real estate gradings.

The universe composition has remained largely the same. However, it has broadened due to the introduction of new products. It is dominated by entity and instrument ratings followed by various kinds of opinions for asset manager companies (AMCs).

Over the years, PACRA rating universe has increased in size gradually; though the pace of growth has remained slow due to low ratings penetration in Pakistan. With the slowdown in the economy, the sluggish trend in rating universe growth is clearly evident during the last year or so. From FY08 onwards, withdrawals picked up. Nevertheless, the universe has retained the growth trend from new ratings.

During the recent period (Jan – Jun11), the growth in PACRA rating universe has emanated mainly from entities, as ten (10) initial entity ratings were assigned. Universe-wide, 22 initial ratings were assigned, whereas, fifteen (15) rating opinions were withdrawn. Withdrawals were concentrated in mutual funds (including asset managers) ratings. Two (2) instruments were redeemed during this period.

193182

200214

225 232

0

50

100

150

200

250

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec08 Jun09 Dec09 Jun10 Dec10 Jun11

Ratin

gs (U

niverse Share %)

FIGURE ISNAPSHOT ‐ PACRA Ratings Composition

(Dec08 ‐ Jun11)

Entity RatingsInstrument RatingsMutual Funds (including Asset Managers)Real Estate GradingsPACRA Rating Opinions

193182 200

214

225 232

0

50

100

150

200

250

‐40

‐30

‐20

‐10

0

10

20

30

40

50


Total PACRA Opinions (Nos.)

New

(with

draw

n / rede

emed

) Ratings (No

s.)

FIGURE IISNAPSHOT ‐ PACRA Ratings Universe Growth

(Dec08 ‐ Jun11)

New ClientsWithdrawals / Redemptions


RATINGS INSIGHT


PACRA ENTITY RATING UNIVERSE

PACRA Entity rating Universe comprises 98 entity ratings as at June 30, 2011. It is heavily tilted towards the investment grade categories (BBB and above). However, with the recent pressure increasing upon credit quality, the lower rungs of the rating scale have seen inhabitance. Sector-wise distribution shows heavy concentration in financial instructions (Banks 23%; insurance companies 16%; investment companies 12%) followed by energy (10%) and oil and gas (7%).

During the current period (Jan – Jun11), in terms of rating activity, 45% of the universe was reviewed and actions taken thereupon. Of the forty six (46) ratings reviewed, there were six (6) upgrades and one (1) downgrade, whereas, thirty six (36) ratings were affirmed. The AA category witnessed the majority of upgrades while the A – BBB

categories housed the downgrades.

A review of the rating actions, however, shows that the size of the rating activity, upgrades and downgrades, remained low – a one notch move either side in all cases. PACRA entity ratings universe had Ten (10) new entrants - initial entity ratings and three (3) withdrawals. For initial ratings, the sector-mix was led by energy (6) followed by one rating each from textiles, insurance, microfinance banks and investment banks.

86

8287

9191

98

70

75

80

85

90

95

100

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Ratin

gs (Nos.)

Ratings category Share (%)

FIGURE IIIPACRA Entity Ratings Composition & Growth

(Dec08 ‐ Jun11)

AAA AA ABBB BB ‐ B CCC ‐ CD All Entity Ratings

‐4

‐3

‐2

‐1

0

1

2

3

Ratin

g Activ

ity ‐upgrades/Dow

ngrades (Nos.)

FIGURE IVEntity Rating Activity across Rating Categories

(For six‐months ended June 30, 2011)

Upgrades Downgrades


RATINGS INSIGHT


PACRA ENTITY RATING UNIVERSE (Entry / Exit) (For period Jan 01, 2011 to Jun 30, 2011)

Entities

Initial Entity Ratings

Withdrawn Entities Last

Rating

1 Sapphire Fibres A 1 Mybank A‐ 2 Asia Insurance BBB 1 Hazara Phosphate Fertilizer BB 3 Tameer Microfinance

Bank A 2 Reem Rice Mills BBB

4 Sapphire Electric Company AA‐

5 Liberty Power Tech AA 6 Atlas Power AA 7 Escorts Investment Bank A‐ 8 Halmore Power

Generation A+

9 Saif Power AA‐ 10 Foundation Power AA‐

ENTITY RATING ACTIONS (For period Jan 01. 2011 to Jun 30, 2011)

ACTION: UPGRADE NUMBER OF ACTIONS: SIX (6)

RATINGS

Ent

ity

(Sec

tor)

New

Prev

ious

Not

ches

Dissemination (Date) - Rating Rationale

Tru

st in

vest

men

t Ban

k

(N

BFC

)

BBB BBB- 1

May 10, 2011 – Emerging from a tight corner, albeit slowly and still heavily dependent upon sponsor support, the bank has a notch upgrade as its financial profile improves owing to deleveraging and management's initiatives to improve liquidity. The positive outlook recognizes the ongoing process for materialization of the bank's initiatives into sustainable revenue streams.

Ask

ari G

ener

al

Insu

ranc

e

(Ins

uran

ce)

A A- 1

January 25, 2011 – The rating reflects the company’s sustainable growth potential, amidst volatile economic fundamentals. The growth is supported by the company’s ability to capitalize on its brand “Askari”. An experienced management, and improved control environment is expected to help the company in managing its loss pattern and business acquisition cost, hence, positively impacting its underwriting performance, which is currently under pressure. The


RATINGS INSIGHT


injection of fresh capital, would supplement the risk absorption capacity of the company.

Uni

ted

Insu

ranc

e

(Ins

uran

ce)

A A- 1

February 02, 2011 – The rating reflects the company’s strong risk absorption capacity emanating from a robust financial base and sound liquidity that adequately supports the company’s high growth stance. The rating incorporates the company's initiatives to strengthen its governance framework. Meanwhile, organizational control environment is expected to benefit from full implementation of real time core software.

Nis

hat C

huni

an P

ower

(P

ower

)

AA AA- 1

April 6, 2011 - The upgrade came as the company successfully began commercial operations. The ratings are supported by low payment risk, emanating from a cash flow stream as guaranteed by the GoP subject to adherence to agreed performance parameters and a reputable O&M Operator (Wartsila). Although Nishat group has majorly entered into power sector recently, its diversified experience and business acumen support the ratings.

Nis

hat P

ower

(Pow

er)

AA AA- 1

April 14, 2011 - The upgrade came as the company successfully began commercial operations. The ratings reflect the low payment risk arising from guaranteed cash flow stream by the GoP subject to adherence to agreed performance parameters and a reputable O&M Operator (Wartsila). and strong sponsor profile owing to association with the Nishat Group.

Nis

hat M

ills

(Pow

er)

AA- A+ 1

February 23, 2011 - The upgrade came as the company is seen having the ability to maintain its positioning in the key markets despite tough economic times. The high ratings find support from the company's diversified revenue stream, strategic investments, large market segmentation, and sound customer base and sustained margins leading to a considerably protected business risk. Moreover, the company’s association with Nishat Group as its flagship company remains a key rating factor.

ACTION: DOWNGRADE NUMBER OF ACTIONS: ONE (1)

RATINGS

Ent

ity

(Sec

tor)

New

Prev

ious

Not

ches


RATINGS

Net

wor

k M

icro

finan

ce

Ban

k

(B

ank)

BBB BBB+ 1

May 4, 2011 - The downgrade for this bank came in response to significant squeeze in business operations, mainly on account of increase in non-performing loans, low deposit base, and minimal operating margins; thereby, subdued performance prospects amidst tough sector dynamics. The ratings


RATINGS INSIGHT


are placed on Rating Watch on May 23, 2011 owing to the majority shareholders’ plan to divest its stake in the bank.


RATINGS INSIGHT


PACRA INSTRUMENT RATING UNIVERSE

PACRA Instrument rating Universe comprises 61 instrument ratings as at June 30, 2011. It is mainly concentrated in the investment grade categories. However, the impact of fall in credit quality is highly evident within this universe. Due to this very reason, fresh debt issuances have remained sluggish and the universe has experienced stagnant growth for the last two and a half years.

During the current period (Jan – Jun11), in terms of rating activity, 63% of the universe was reviewed and actions taken thereupon. Of the thirty nine (39) ratings reviewed, there were two (2) upgrades and one (1) downgrade, whereas, twenty nine (29) ratings were affirmed. The AA category witnessed the majority of upgrades while downgrades were concentrated in the A and CCC categories.

The growth in new instrument ratings, however, remained troublesome as only four (4) initial instrument ratings were added to the universe. New debt issuance underlying these three instruments amounted to PKR 13bln.

57

56

59

6061

61

53

54

55

56

57

58

59

60

61

62

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Ratings (Nos.)


FIGURE VSNAPSHOT ‐ PACRA Instrument Rating Universe Composition

& Growth(Dec08 ‐ Jun11)

AAA AAA BBBBB ‐ B CCC ‐ CD All Instrument Ratings

‐1.5‐1

‐0.50

0.51

1.52

2.5

Ratin

g Activ

ity ‐upgrades/Dow

ngrades (Nos.)

FIGURE VIInstrument Rating Activity across Rating

Categories(For six‐months ended June 30, 2011)

Upgrades Downgrades


RATINGS INSIGHT


PACRA INSTRUMENT RATING UNIVERSE (Entry / Exit) (For period Jan 01, 2011 to Jun 30, 2011)

Entities / Issuers Initial Instrument

Ratings

Entities / Instruments Withdrawn Instrument Ratings

1 Bank Al‐Habib (PKR 3bln TFC issued Feb11)

AA Eden Developers (PKR 200mln Sukuk)

BBB‐

2

ORIX Leasing Pakistan (PKR 2bln TFC‐V issued Jun11)

AA+ House Building Finance Corporation (PKR 1.5bln Sukuk)

A+

3

Engro Corporation (PKR 3Bln STFC)

AA

4

ORIX Leasing Pakistan (PKR 5bln TFC‐IV issued Jan08)

AA+

INSTRUMENT RATING ACTIONS (For period Jan 01, 2011 to Jun 30, 2011)

ACTION: UPGRADE NUMBER OF ACTIONS: TWO (2)

Inst

rum

ents

(S

ecto

r)

New

Prev

ious

Not

ches


Libe

rty P

ower

Tec

h

(Pow

er)

Sukuk (PKR 13,488mln)

April 6, 2011 - The upgrade came based upon sound management quality that resulted into timely commissioning of the power plant with minimal cost overruns. The returns are guaranteed subject to adherence of agreed operational performance benchmarks as agreed under long-term Power Purchase Agreement (PPA). The ratings incorporate the performance risk of the plant, which, to a greater extent, has been minimized by the appointment of Wartsila, a firm of international repute with considerable experience in Pakistan, as power plant operator. Though cash flows are guaranteed, weak financial discipline of the power purchasing authority remains a key rating factor.

AA AA- 1

Senior Term Finance Facility (PKR 1,649mln)

AA AA- 1

ACTION: DOWNGRADE NUMBER OF ACTIONS: ONE (1)


RATINGS INSIGHT


Inst

rum

ents

(S

ecto

r)

New

Prev

ious

Not

ches


Pace

(C

orpo

rate

) Privately placed & secured Sukuk (PKR 400mln)

March 16, 2011 – The Sukuk ratings fell in highly speculative grade category of CCC as the company defaulted on its contractual obligations and suffered a downgrade to Selective Default.

CCC A+ 12


RATINGS INSIGHT


PACRA ASSET MANAGEMENT OPINIONS UNIVERSE

PACRA Asset Management Opinions Universe comprising four kinds of opinion:

1. Asset Manager Ratings

2. Capital Protection Ratings

3. Fund Stability Ratings

4. Mutual Fund Rankings

PACRA provides a comprehensive coverage on asset managers. PACRA’s asset manager ratings are an opinion upon the quality of the asset manager and its systems and controls.

With the continuing tilt of the AMC industry towards low-risk tolerance, both capital protection ratings and fund stability ratings are becoming increasingly popular with the fund types being introduced in Pakistan recently. The growth in these two types of AMC ratings is mainly attributable to the launch of numerous money market funds in the industry to cater to the safe haven investor mentality prevailing in the wake of the 2008 AMC industry crisis.

3

14

21

28

31

0

5

10

15

20

25

30

35

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jun09 Dec09 Jun10 Dec10 Jun11

Ratings (Nos.)


FIGURE XSNAPSHOT ‐ Fund Stability Ratings Composition

& Growth(Jun09 ‐ Jun11)

AAA(f) AA(f) A(f)BBB(f) BB(f) B(f)Total

13

12 12 12 12

10

0

2

4

6

8

10

12

14

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Ratings (Nos.)


FIGURE VIIISNAPSHOT ‐Asset Manager Ratings

Composition & Growth(Dec08 ‐ Jun11)

AM1 AM2AM3 AM4AM5 All Asset Manager Ratings

1

2

3

4

0

1

2

3

4

5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec09 Jun10 Dec10 Jun11

Ratings (Nos.)


FIGURE IXSNAPSHOT ‐ Capital Protected Funds

Ratings Composition & Growth (Dec09 ‐ Jun11)

AAA AA+ AAAA‐ A BBBBB All Ratings


RATINGS INSIGHT


33

25 21 2426

27

0

5

10

15

20

25

30

35

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Ratings (Nos.)

Ratin

gs category Share (%)

FIGURE XISNAPSHOT ‐Mutual Fund Rankings

Composition & Growth (Dec08 ‐ Jun11)

1‐star 2‐star3‐star 4‐star5‐star All Rankings

Mutual fund rankings, primarily sought after by equity funds, saw a jump in 2010 but have remained subdued eversince as investors continue to be shy of assuming risky avenues of investment. With new equity funds not being launched, the growth in mutual fund rankings universe remains stagnant.


RATINGS INSIGHT


FALL IN CREDIT QUALITY

During the recent period (Jan – Jun11), PACRA’s credit quality has taken a hit as the operating environment remained tough for borrowers. Three entities (corporates) defaulted on their obligations and their entity and

affected instrument ratings were taken into D category.

Pace - March 16, 2011: The entity and the delinquent instrument ratings were put in default category as the company missed an interest payment on its listed and secured TFC of PKR 1,500mln owing to

significant cash flow constraints. As per the management, the company is in the process of divesting a portion of Pace's investment in a real estate project to one of the Middle-Eastern sponsors of First Capital Group. However, owing to recent crises in the Middle-East and North

Africa (MENA) region, the respective arrangements are taking some time to materialize.

Agritech - March 31, 2011: The ratings were put in the default category as the financial profile of the company deteriorated owing to acquisition of sizable borrowings on its balance sheet, transferred from the parent company, Azgard Nine and it

failed to perform on most of its contractual obligations. PACRA would continue to monitor the ratings and would update its opinions accordingly.

Fall in Credit Quality (For period Jan 01, 2011 to Jun 30, 2011)

Entities Ratings

New Previous (Action date) Notches

Pace SD A (01Oct10) 14

Agritech D SD (29Sep10) BB+ (30Jun10) 9

Azgard Nine D SD (29Sep10)

BB+ (30Jun10) 9

PACE Listed & secured TFC I (PKR 1,500mln)

Ratings New Previous Notches D A+ 14

Agritech Instruments Ratings

New Previous Notches

Privately placed secured TFC I (PKR 1,500mln)

D CCC 2

Privately placed secured TFC II (PKR 6,900mln)

D CCC 2

Senior syndicated term finance facility (PKR 3,000mln)

D CCC 2

Privately placed Sukuk (PKR 1,600mln) D CCC 2

10

43

0

2

4

6

FY08 & Before

FY09 FY10 FY11

PACR

A De

faults (N

os.)

FIGURE VIIFALL IN CREDIT QUALITY

PACRA Defaulted Entity Ratings


RATINGS INSIGHT


5

38 42

7 1 0 46

16

43

24

2 0 411

54

85

31

3 0 8

0

20

40

60

80

100

AAA AA A BBB BB ‐ B CCC ‐ C D

Ratings (Nos.)

FIGURE XIIIPakistan Entity Ratings Universe Compostion in

Rating Categories (As @ June 30, )

PACRA JCR‐VIS Universe

Azgard Nine - March 31, 2011: The ratings defaulted as the company failed to perform on its contractual obligations owing to protracted pressure on its financial profile. The company has completed restructuring of its borrowings. 'Master Restructuring and Intercreditor Agreement' was signed by all the stakeholders in Dec-10. The agreement, while capturing various aspects of debt restructuring, has stipulated a number of qualitative covenants including special audit, quality of external auditors, and divestment of Agritech Limited.

Azgard Nine Instruments

Ratings

New Previous Notches

Secured TFC I (PKR 2,144mln)

D CCC 2

Secured TFC II (PKR 2,500mln)

D CCC 2

PAKISTAN’S RATINGS UNIVERSE

Pakistan’s Ratings Universe is shared amongst two domestic credit rating

agencies (DCRAs) – PACRA and JCR-VIS. Between themselves, they have ~200+ public entity ratings. The ratings universe is concentrated mostly in investment-grade categories as most rated entities are either financial institutions (where ratings are mandatory by the regulator) or prominent corporate having very high credit quality. Rating penetration, thus, remains low in Pakistan, especially

amongst corporate, where ratings are optional and primarily driven by their need to employ debt financing for expansion. From 2008 onwards, as the economic environment toughened, the DCRAs saw some of their opinions failing to stand the sof time. As their universe was heavily concentrated on the higher side of the rating scale, defaults also emanated from investment grade rating categories.

188 216 232

189192 198

377

408

430

340

360

380

400

420

440

0

100

200

300

400

500

Jun09 Jun10 Jun11

Universe Entity Ratings (Nos.)

DCRA

Entity

Ratings (N

os.)

FIGURE XIIPakistan Entity Ratings Universe

Growth(FY09 ‐ FY11 )

PACRA JCR‐VIS Universe


RATINGS INSIGHT


10

12

14

16

18

20

Dec‐08

Mar‐09

Jun‐09

Sep‐09

Dec‐09

Mar‐10

Jun‐10

Sep‐10

Dec‐10

Mar‐11

Jun‐11

FIGURE XVMonetary Tightening increasing

Borrowing Costs

Discount Rate KIBOR‐6m Infection Ratio

THE ECONOMIC BACKDROP

Pakistan economy has been in a low-growth phase since FY08. The main factors are a mix of external and domestic shocks. During the last fiscal year (FY11), GDP grew by a mere 2.4% against an originally estimated objective of 4.5%. Deconstructing GDP growth, agriculture is the main laggard. Moreover, large scale manufacturing is the worst affected sector as it has grown by a yearly average of only 0.6% in the years between FY08-11. The primary factors that explain this sluggish growth are (i) persistently high inflation, and (ii) low private sector credit off-take. In FY11 headline Inflation stood at 13.1% and since FY08, inflation has not receded below double digit levels due to high levels of food and energy prices. Private sector credit (PSC) growth has stood at less than 3% since Dec-08. This is due to the government’s pressing demand for credit that has led to crowding out of private sector in addition to causing monetary slippages, which ascribe to causing inflation. To curb rising inflation coinciding with government borrowing induced monetary pressures, the SBP raised the discount rate seven times between Dec-08 and June-11. These increased the cost of borrowing for the private sector reflected in the KIBOR. Further, rising interest rates coupled with uncertainty in a recessionary economy has impacted the credit quality, whereby the infection ratio (NPLs as % of loans) has risen from about 11% in Dec08 to more than 18% in Mar11. During FY12, growth is expected to benefit from surpluses in agriculture. However, growth stimulus emerging from private sector credit still remains an area of concern, specially, if the government fails to exercise fiscal discipline. Inflation may attenuate gradually on account of declining oil prices internationally; however, internal price pressures (quarterly increases in power tariffs to resolve the circular debt issue) remain. to exert price pressures.

‐6‐3036912

2,200

2,400

2,600

2,800

3,000

3,200

Dec

‐08

Mar‐09

Jun‐09

Sep‐09

Dec

‐09

Mar‐10

Jun‐10

Sep‐10

Dec

‐10

Mar‐11

FIGURE XIVPrivate Sector "Crowded Out"

Private Sector Credit (PKR Bln)Growth (%)


RATINGS INSIGHT


THE INDUSTRY VIEW

THE INDUSTRY VIEW

1HFY11 Industry Performance 1HFY12 Credit Quality View

Ban

king

Banking profits remain healthy even as asset quality deteriorates and deposits are growing, partly on the back of continued high workers’ remittances. The weakened economic environment has caused banks to shift to less risky avenues, (government securities) limiting credit offtake to the private sector. Pakistan banking sector continues to experience one of the highest interest rate spreads.

The macroeconomic landscape of Pakistan remains uncertain. Continuing weakening in the asset quality of the banks is a major concern. The pace of accumulation of NPLs has stalled lately, but it would be challenging for the banks to maintain asset quality amidst subdued business sentiments.

Insu

ranc

e

Eversince the economic downturn in 2008, the sector has been facing major challenges arising from decelerating GDP growth, precarious security situation, widening fiscal imbalance, and rising inflation. The economic slowdown has further intensified the competitive landscape of the insurance industry putting pressure on premium pricing. Consequently, the industry growth as well as overall profitability continues to remain uncertain. The sector's profitability, experiencing a fall in 2010 due to natural calamity, has exhibited some recovery.

The industry, cognizant of growth impediments, is taking steps to improve its operating platform to offer an improved level of services. Moreover, the regulator has taken a strict stance to invariably implement governing regulations in the industry. Entry of a broad array of reinsurers in the market is also expected to bode well for risk absorption capacity of the insurance sector.

Ferti

lizer

In terms of sector dynamics, Pakistan has a supply deficit in urea that it meets through imports. It also has subsidized natural gas - the key raw material. Owing to the capital intensive nature of the sector, the recent expansions by large players (~$2bln of new investment) has pushed the average financial leverage for the sector to a significant level. However, this is supported by stable cashflows available to the sector through its robust business model. The sector has strong and stable margins (~42%).

The strong cash flows are likely to continue and comfortably suffice the debt servicing requirements for the sector. Gas curtailment to the fertilizer sector has emerged as a major risk to the sector in recent times and is likely to persist. It has been the main reason behind multiple urea price hikes during the year to keep business margins intact. However, once the international prices ease off, the price hike strategy to mitigate production loss would be unlikely to provide further support.

Oil

& G

as

The country’s energy mix comprises oil (31%), gas (49%), coal (7%), LPG (1%), hydro electricity (11%) and nuclear electricity (1%). Of these, oil and gas are the major energy resources, contributing around 80% to the country’s total energy supplies. Pakistan is one of the most gas dependent

The domestic prices of oil & gas are linked to international prices therefore the industry is continuously exposed to the cyclicality in the international prices. The irregularity in committed payments to the power producers, in turn, from GoP has


RATINGS INSIGHT


economies in the world. Though, sector remains profitable, the continuing circular debt issue has triggered the need for short-term credit requirements for the industry, mostly evident in OMCs and distribution segments.

made circular debt a chronic issue in Oil & Gas sector. Recent policy change including oil price revision in a bid to remove subsidies, though helping to ease circular debt, will burden the consumers.

Pow

er

The sector is steadily growing and after several thermal IPPs coming online, alternative energy IPPs are entering the arena. Prevailing circular debt remains the key issue for power sector. Few of the IPPs faced challenges keeping their plants operational due to non payment by WAPDA, which, as a result, impacted their ability to timely fulfill their commercial and financial obligations. PACRA issued a detailed viewpoint on the power sector on June 23, 2011, which is available on PACRA’s website

Pakistan is an energy deficit country and the demand is expected to grow. However, financial constraints on part of the government and other political issues remain a key hindrance to development of sustainable sources of power generation. Moreover, inter-corporate debt would continue to pose major challenge towards cash flow management.

Cem

ent

The cement industry with its cyclical nature and intense competition has experienced the weakening of tacit understanding amongst producers, thus, leading to a price war for most of 2010. Meanwhile, rising energy prices coupled with lower retention prices and sluggish demand in local and export markets has adversely impacted the sector’s profitability. However, prices have shown signs of bottoming out and a significant price recovery in the local market has been seen since January 2011.

The sector’s performance is likely to improve mainly owing to the cement manufacturers’ cognizance towards margin-led recovery as demand at both local and export fronts may be limited. However, a recent tax reduction would bode well for the industry. Meanwhile, any downward movement in cement prices for an extended period of time and any increase in energy cost would have negative repercussions for the industry.

Text

iles

Textile sector experienced significant growth in the recent period, primarily attributed to improved exports (FY11: USD 13.8bln, 35% YoY). This had limited volumetric expansions and was mainly driven by hike in prices, as the cost of basic raw material – cotton – observed a rising trend in the wake of supply constraints. During FY11, ready-made garment segment was the major contributor in terms of both value and quantity after knitwear. Lately, in the hopes of improved global supply, cotton prices have eased off significantly, causing inventory losses to most players.

Key risks faced by the industry are volatility in cotton pricing, power shortage, rising inflation, high interest rates and weak law & order situation. The performance of textile sector depends primarily on the demand dynamics of the international market. The cotton pricing has lately observed a significant dip, based on expected increase in upcoming cotton crop internationally. However, it is expected that pricing would show relatively stable pattern over the medium-term.

AM

Cs Pakistan asset management industry is

in a development stage. After going through a rough patch, the industry AUMs have depicted a modest growth

Investments are expected to remain inclined towards money-market funds. The investor confidence in the fixed income segment will


RATINGS INSIGHT


of ~22% over the last year However, despite the stock market recovery, the AUM of the equity funds has declined over the last year. At present, high-liquidity low-risk money market funds are the main growth drivers in the industry. (Money market funds AUM: May11: 80bln, May10: PKR 34bln).

remain subdued due to the depressed TFC market and the fact that the market is still struggling with a large portfolio of non-performing instruments. However, a new, albeit limited, avenue in the income fund category has emerged lately – government securities fund due to high GoP appetite to manage its fiscal deficit. Apart from product substitution, the increase in AUM base would remain a challenge for the industry.

`

THE PAKISTAN CREDIT RATING AGENCY LIMITED Awami Complex, FB‐1, Usman Block New Garden Town Lahore‐54600 PABX: +92‐42‐35869504 Fax: +92‐42‐35869504 www.pacra.com DISCLAIMER:

PACRA has used due care in preparation of this publication. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any error in such information. None of the information in this document may be copied or otherwise reproduced, stored or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s written consent. Our reports and ratings constitute opinions, not recommendations to buy or to sell

Analysts: Humaira Jamil Manager Rating Criteria +92 42 3586 9504 [email protected] Shahzad Saleem Chief operating officer +92 42 3586 9504 [email protected]

PACRA – Pakistan’s pioneer credit rating agency – is continuing itsjourneyinitsseconddecadeofoperations.Thecompanydistinguishesitself through a culture of constant innovation, improvement andservice quality. PACRA offers a complete range of credit ratingservices. Ithasacomprehensiveorganizational structureand setofresources to support its business. PACRA team of 40 analystscomprises a mix of highly qualified business professionals andaccountants. To date, PACRA has assigned over one thousand fifyopinions

ABOUT PACRA…………

Documents

Ratings Insight-Front Cover-Aug11 · 2012-03-14 · Nishat Chunian Power (Power) AA AA- 1 April 6, 2011 - The upgrade came as the company successfully began commercial operations