Govt to raise up to Rs300bln via 10-year sukuk

KARACHI: The government plans to raise Rs200 to Rs300 billion via 10-year privately placed sukuk bonds to fund staggering circular debt in the power sector, sources familiar with the matter said on Tuesday.

They said the sukuk issue is expected to be through a private placement process and marketed primarily to qualified investors such as Islamic financial institutions and mutual funds.

The government would hire six Islamic banks to arrange the transaction, with Meezan Bank expected to act as lead arranger, according to the source. “The officials of ministry of finance and the representatives of Islamic banks had a meeting to negotiate the terms and conditions for the potential issuance in Islamabad on Tuesday,” the source said.

“Power Holding Private Limited (PHPL) is likely to agree to price a privately placed sukuk issue, offering six months KIBOR (Karachi Interbank Offered Rate) plus one percent.”

The issue is expected to be launched later this month if the stakeholders agree to the terms and conditions. A structure known as diminishing musharaka or ijara would be used for the planned transaction. In Islamic finance, musharaka is a partnership arrangement between two or more parties where each partner makes a capital contribution to the partnership. However, ijara is based on a sale and leaseback approach.

The source told that the planned sukuk would carry the government guarantee and profit payments.

The likely sovereign sukuk issuance is part of the plan to raise funds to clear the circular debt of the power companies which has exceeded Rs1.2 trillion. The Economic Coordination Committee (ECC) last month decided to secure up to Rs200 billion in Islamic financing on behalf of PHPL against the 43 assets of electric power generation and distribution companies - Gencos and Discos.

The ECC constituted a committee to start consulting mechanism for Islamic financing facility for PHPL through a consortium of banks headed by the Meezan Bank.

However, the committee so far has failed to finalise the mechanism for the repayment plan of the power firms. Islamic finance experts see a growing demand for sovereign sukuk by Shariah-compliant financial institutions to manage their surplus funds.

“It will be good for the Islamic banking industry if the government comes up with a new sukuk issuance. Since the sukuk is SLR-eligible, the Islamic banks will have investment options to park their excessive liquidity.” Government of Pakistan ijara sukuk worth of Rs314.3 billion would mature in three tranches in December, February, and March. The maturing of ijara sukuk of Rs118 billion was due on December 18. Islamic banks have been looking at the government and the central bank as to how they would address a lack of Shariah-compliant instruments to help Islamic lenders manage their short-term liquidity.

Industry sources said the ministry of finance was seeking to facilitate the Islamic banking industry in investing excess funds through the issuance of SLR-eligible Bail-Muajjal instrument. Under this mechanism, the government was likely to purchase maturing sukuk on a deferred payment basis.