Govt decides to go for debt re-capitalization, refinancing

ISLAMABAD: The government has reportedly decided to go for debt re-capitalization and refinancing of Rs 103.765 billion of two RLNG-fired plants from local banks and DFIs before their equity sale, sources close to Finance Minister told Business Recorder.

Both Haveli Bahadar Shah and Balloki Power plants owned by National Power Park Management Company (Private) Limited (NPPMCL) were setup with Government of Pakistan (GoP) funding equity instead of the 70:30 debt- to-equity ratio benchmark as allowed in Nepra’s tariff for NPPMCL’s power plants. Therefore, in order to align the capital structure with the tariff, 70% of project costs will be based on long-term financing. As per allowed benchmark long-term financing requirement, including repayment/adjustment of GoP’s guaranteed loan, presently stands at Rs 103.765 billion.

As part of the NPPMCL privatisation process, it was originally envisaged that excess funding from GoP will be replaced within LIBOR + 4.5% (for foreign denominated financing) and

KIBOR + 3.5% (for domestic currency denominated financing) as per the NEPRA (Benchmarks for tariff determination) Guidelines, 2018.

However, after getting into advanced stage of the NPPMCL privatisation process, Nepra confirmed that any refinancing to replace the excess GoP funding and to align capital structure of NPPMCL with Nepra’s determined tariff, has to be within the KIBOR + 1.8% benchmark. This benchmark was based on GoP direct or guaranteed funding which is not comparable to commercial financing without sovereign recourse. Arrangement of long-term financing to return excess GoP equity/loan and to debt recapitalize NPPMCL within the limits of KIBOR + 1.8% locked by NEPRA, therefore, became a stumbling block in privatisation of the company.

On July 23, 2020, Chairman, Privatisation Commission and other concerned authorities held a meeting with the heads of the local banks in the State Bank of Pakistan, Karachi, to explore the possibility of local long-term financing within the limit fixed by Nepra. At that time the banks linked financing to the on-going negotiations with Independent Power Producers (IPPs) and showed concerns about the issue of circular debt and price ceiling of KIBOR + 1.8% determined by Nepra.

Subsequently, Cabinet Committee on Privatisation (CCoP) in its meeting on November 16, 2020, constituted a Committee under the chairmanship of the then Advisor to the Prime Minister on Finance and Revenue to resolve the issues hampering the privatisation of NPPMCL. On clarification of Nepra in the meeting of Committee held on January 07, 2021 that rate for debt financing (KIBOR + 1.8%) cannot be revised, it was agreed that PC and Financial Advisory Consortium (FAC) would explore possibility of replacing GoP’s excess equity and loan through commercial burrowing/local debt financing within the limits of KIBOR + 1.8%. It was also recommended that in the event of commercial borrowing before privatisation, if the entire amount of excess equity is not arranged, the remaining portion may be adjusted as PDFL long-term loan.

The sources said PC and FAC therefore again held meetings with local banks wherein it was indicated that appetite for debt financing may increase after settlement of IPPs overdue receivables by GoP. Now, after partial settlement of outstanding receivables of IPPs it is anticipated that appetite for power sector has improved. Therefore, FAC presented a scheme of commercial borrowing for NPPMCL to refund excess GoP equity/ loan and release of GoP guarantee before the committee, chaired by Finance Minister, in its meeting on July 15, 2021 to meet the following: (i) align capital structure of NPPMCL with Nepra’s determined tariff, within Nepra’s determined benchmarks including pricing and tenure parameters; (ii) assist GoP in dis-investing excess funding and release of GoP guarantee, as part of NPPMCL privatisation process; (iii) progress on a subsequent equity tranche after successful completion of debt process because in case both debt process and equity tranche continue to remain combined, there could be further delay; (iv) meet strict timelines agreed with the International Monetary Fund (IMF); and (v) mitigate concerns of equity process participants on delay in resolution of sectoral issues and problems related to the power plants.

After a discussion, the proposal of debt recapitalization and refinancing was considered in the meeting of the committee and all concerned were directed to complete all necessary processes in this respect at the earliest. It was further directed that sale of equity be undertaken on fast track basis after completion of debt recapitalization.

The sources said a meeting of the Transaction Committee (TC), presided by the Minister/Chairman, PC, was held on July 28, 2021 in which TC agreed to the scheme of debt recapitalization before equity sale.

The sources said PC Board is expected to recommend debt re-capitalization and refinancing of NPPMCL from the local banks, for obtaining formal approval of CCoP as per the following broad terms which remain subject to comments from the potential lenders: Expression of Interest (EoI) to be invited from scheduled banks and DFIs through an amount of Rs 103.765 billion for a period up to 7 years (aligned with Nepra’s debt schedule) as per Nepra’s determined tariff maximum of KIBOR + 1.8 per cent. The standard security package including charge over assets and cash flows of NPPMCL will be without any recourse to the GoP. The scheduled banks and DFIs who submit EoIs will be issued Request for Proposal.—MUSHTAQ GHUMMAN