The Karachi Electric Supply Company plans on issuing a Rs2 billion bond directly to retail investors, bypassing traditional investment banks, becoming the second major Pakistani firm after the Engro Corporation to do so.
At an analyst briefing held at the Marriott Hotel in Karachi, KESC executives announced that they were in negotiations with the Karachi Stock Exchange as well as commercial banks. They expect to be able to make the offering by sometime in November, though the company did not specify a date. KESC executives said that the initial public offering would last for three months.
The bond will be available through the branch network of commercial banks as well as the retail branches of some brokerage firms. KESC did not provide details about which banks the bond would be available from. No details were available either about what rate the utility would offer on its bond.
In keeping with a tradition set by Engro, the bond will have a name: Azm. Engro had named its bond the Engro Rupiya and was able to raise Rs8 billion in two separate offerings of the Rupiya certificates.
Yet Engro also has strong and positive brand recognition as the company that set up the world’s largest single-train urea plant in Pakistan, and the conglomerate whose food subsidiaries’ products have become household names. By contrast, most people only speak of KESC to complain about power outages.
Another key difference between Engro and KESC: the former is profitable, the latter is not. For the financial year ending June 30, 2011, KESC made a loss of Rs9.4 billion.
The company’s management, however, felt that there was a strong investment case to be made. CFO Tayyab Tareen pointed out that for the first time in over a decade, KESC had positive earnings before interest, taxes, depreciation and amortisation (EBITDA) – a key measure of the company’s cash flows – of around Rs3.5 billion. KESC management has also projected a profit for the financial year 2012.
At the analyst briefing, the management spoke about how they had improved the efficiency of their power generation operations and would be spending $100 million over the next few years to improve the transmission grid, including using aerial bundling cables to help prevent theft from the grid.
KESC loses about 7% of the power it generates due to the grid quality – only slightly above international norms – but about 25% more through theft, for a total of 32% line losses. For the year 2012, the company targets bringing that ratio down to 29%, most of which, the management implied, would be through reducing theft.
“We don’t need to introduce aerial bundling cables in all areas of Karachi,” said Naveed Ahmed, head of corporate strategy at KESC. “We only need to focus on some key problem areas.”
Inadequate institutions
The issuance of retail bonds by some of the best known companies in the country is reflective of the limitations of the financial services sector in Pakistan, according to several experts. Companies want to borrow money but find bank borrowing either too expensive or too restrictive.
“A retail bond offering can often be cheaper than a normal bond since it is only competing against the offerings available to retail investors, where the best term deposit will yield around 12%,” said one investment banker who wished to remain anonymous. “Engro’s bond, however, was yielding 14.5%, which compares well for a retail investor but is lower than the 15% or higher that most other bonds available to institutional investors yield.”Another reason could be the transaction costs: the commissions paid to commercial banks for distribution are far lower than what the company would have to pay an investment bank in advisory and underwriting fees.
Published in The Express Tribune, October 28th, 2011.
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