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JCR-VIS assigns preliminary rating to the proposed Sukuk issue of Neelum Jhelum Hydropower Company.

JCR-VIS Credit Rating Company Ltd. (JCR-VIS) has assigned preliminary rating of 'AAA' (Triple A) to the proposed Sukuk issue of Rs. 100 billion of Neelum Jhelum Hydropower Company (Private) Limited (NJHPC). Outlook on the assigned rating is 'Stable'. Ratings will be finalized upon review of signed legal documents and issuance of GoP guarantee.

NJHPC was setup to design, construct, own, operate and maintain Neelum Jhelum Hydropower Project (NJHPP); a 969MW run-of-the-river project in Azad Jammu & Kashmir. NJHPP will add around five per cent to the country's total installed power generation capacity and will be the 4th largest hydropower project in the country representing 12 per cent of total installed hydel capacity. Annual electricity generation from the project is expected at 5.15 billion units at average 59.4 per cent capacity utilization. As per the revised PC-1 2015, the total project cost is estimated at Rs. 404billion with the project having achieved 80 per cent physical completion. Around three fourth of the total cost is being funded through debt while the remaining portion will be funded through equity. The first generating unit of the project in expected to start production by mid-2017 and the rest of the three units are planned to come online in a phased manner by December'2017.

Sukuk will be unlisted, privately placed having a tenor of 10 years (inclusive of a grace period of two years) and will be used to fund the NJHPP. Sukuk will have semi-annual principal and rental payments and draw down is planned in three tranches. Apart from Government of Pakistan (GoP) guarantee, security structure of the Sukuk entails charge on all unencumbered present and future assets of the company and exclusive lien over debt payment account (DPA). As per the waterfall mechanism, an amount equivalent to one-sixth of the installment amount will be deposited each month so that DPA on the installment date is equivalent to the installment amount. In case of any shortfall in DPA Account by NJHPC, WAPDA will inject the required funds.

The assigned rating to the proposed Sukuk issue incorporates the following factors:

Unconditional and irrevocable first demand guarantee issued by the President Islamic Republic of Pakistan (on behalf of the GoP) covering issue amount of the Sukuk alongwith profit payments. GoP would pay the entire called amount immediately upon receiving a demand notice from the trustee. Ratings also reflect financial strength and demonstrated support from the parent entity, Water and Power Development Authority, in the form of equity injection and funding support.

Financial viability is supported by the tariff mechanism for hydropower projects which is based on cost plus return on investment.

The project is based on a perennial river system and the supply of water has been determined to be adequate, given the water treaty arrangements. Moreover, hydrological risk is to be borne by the power purchaser as per power policy.

Hydropower generation is the cheapest source of electricity (over the long term) and will resultantly be placed highest in the economic merit order.

Technical viability has been assessed by reputable international consultants and multilateral agencies

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Publication:CPI Financial
Date:Apr 17, 2016
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