Recently, K-Electric, the main electricity supplier in Karachi, Pakistan issued Sukuk (Islamic bonds) to finance its increasing demand for electricity for the megacity. The following article originally published on www.samaa.tv discusses its profit-sharing initiative in detail.
You can buy K-Electric’s Islamic bond (Sukuk) with a minimum investment of Rs5,000 and earn a tentative profit of up to 7% per quarter.
The profit is based on a three-month Karachi interbank offered rate (KIBOR)– currently 6.7%, plus 1.7% per annum for Sukuk.
K-Electric launched listed Sukuk of up to Rs25 billion, a Shariah-compliant investment instrument. They have been offered through an initial public offering (IPO).
According to K-Electric, Rs23.7 billion has already been raised through a pre-IPO placement with the remaining Rs1.3 billion being offered to the general public from July 23 to August 20. Individual investors can apply from July 23 to August 2, whereas all other investors including individuals and institutional investors, can apply from August 3 to August 20.
The Sukuk will be offered in denominations of Rs5,000 or multiples. Therefore, investors are subject to a minimum investment amount of Rs5,000.
After the completion of the IPO, Sukuk will be listed on the Pakistan Stock Exchange, providing a trading platform for investors during the life of the instrument. Sukuk holders will be able to sell or buy the Sukuk through the PSX’s TREC holders. The price will largely depend on the bond market behavior and interest rate policy. Hence, the price may rise or fall and result in an increase or decrease in the value of the Sukuk.
The profit from the Sukuk may vary when the KIBOR changes. The profit can either increase or decrease in the future based on the rates applicable at that particular time, subject to a floor (minimum) of 2% and a cap (maximum) of 25% to comply with the Shariah principle.
It will be offered for a period of seven years (inclusive of a two-year grace period) from the issue date. Sukuk will be redeemed in 20 equal payments on a quarterly basis. The first such redemption will be due at the end of the 27th month from the issue date.
A Sukuk is an Islamic financial certificate that complies with Shariah law. The issuer of a Sukuk sells an investor group a certificate and then uses the proceeds to purchase an asset, of which the investor group has partial ownership. This means that Sukuk holders receive a portion of the earnings generated by the associated asset.
The primary utilization purpose of the Sukuk proceeds is to fund routine operations and capital expenses requirements of the company. Bridge facility (short-term loan) of Rs20 billion was availed earlier from HBL for the same purpose and has already been settled through pre-IPO proceeds of the Sukuk issue.
Arif Habib Limited will act as the market maker for the Sukuk. The market maker will at all times hold at least 1% of the IPO portion of Sukuks. It shall also ensure that net buying or net selling does not exceed 0.5% of the Sukuk certificates of the IPO portion during a business day and its inventory shall not exceed Sukuk certificates equivalent to Rs25 million in value.
However, the Sukuk comes with a default risk associated with the repayment capacity of the company to service the Sukuk redemptions and profit payments. There is also a risk that there may be a timing mismatch between the receipt of consumer collections and payment due dates of profit payments. Since the Sukuk will be redeemed through 20 equal quarterly installments, payment risk is largely weighted on those repayment dates.
Another risk associated with the issue is the Shariah structure risk. The structure is based on rental payments from identified assets. Total loss of assets or partial loss that may impair the usability of the Sukuk assets will impact the ability of the issuer to pay rentals and/or redeem Sukuk.
According to the company’s prospectus, it has no history of credit default. The issue is devised to evenly spread the principal repayments during the tenure which will lower the debt service burden or financial obligations on K-Electric. This is ensured through 20 equal quarterly principal repayments after the grace period.
In case of a default, the trustee may exercise its right and funds will not be released to K-Electric without the trustee’s permission. In this case, the trustee may use the collection proceeds to adjust the Sukuk holders’ due amount. The trustee for the Sukuk is Pak Brunei Investment Company Limited.
In case KE fails to raise Rs1.3 billion through the IPO from public subscription, the Sukuthe k issue will be considered successful at the amount raised through the IPO plus the pre-IPO portion. The Sukuk issue and IPO will be considered successful on the basis that the proceeds are to be used to fund routine operations and capital expenditure requirements.
Major shareholders and sponsors of the issuer are KES Power Limited and the Government of Pakistan.
K-Electric is engaged in the generation, transmission and distribution of electric energy to industrial, commercial, public sector and residential consumers under the Electricity Act, 1910 and NEPRA Act, 1997, in Karachi.
The company reserves exclusive rights for distributing power within its service territory i.e. city of Karachi and adjoining areas of Sindh and Balochistan and serves over 2.9 million consumers.