Dawood refinances Rs4.8b in debt

Meezan Bank serves as lead arranger of syndicated Islamic finance facility.

KARACHI:

Amidst concerns over its ability to continue operations during the winter months, Dawood Hercules Fertilizers has refinanced about Rs4.8 billion of its debt, raising a syndicated Islamic financing facility to pay off bondholders of a sukuk (Islamic bond) that matures this year.

Meezan Bank, the largest Islamic bank in the country, served as financial advisor and lead arranger on the transaction. Allied Bank and United Bank jointly led the consortium that included AlBaraka Bank, BankIslami and Burj Bank, according to a press release issued by Meezan.

The ‘target return’ – Islamic banks do not use the term ‘interest rate’ – for the financing facility was set at a variable rate of the 6-month Karachi Interbank Offered Rate (KIBOR) plus 1.1%. The loan will mature in five years.

The loan was arranged to pay off the principle on what was originally a Rs7.7 billion Islamic bond that was issued in 2007 to fund the purchase of equipment and other capital expenditure. Meezan Bank itself is one of the biggest holders of that bond. Two tranches of the bond – each Rs2.5 billion – remain outstanding, the first due on March 18 and the second on September 18 of this year.

There have been some concerns over the profitability of Dawood Hercules’ fertiliser business, which still constitutes the bulk of revenues and profits for its parent conglomerate, the Dawood Hercules Corporation. While the fertiliser business earned about Rs2.1 billion in profits in 2010, the first nine months of 2011 have thus far been far less than promising, with profits plummeting 60% compared to the same period in the previous year, to just Rs369 million.

The key problem: a shortage of gas. According to sources in the fertiliser business, Dawood Hercules has been the worst-hit fertiliser company to be affected by the nationwide shortage of gas. The company’s fertiliser plant was down for about 192 days last year owing to a shortage of gas, about ten days longer than the next worst hit, according to sources familiar with the matter. Officials throughout the fertiliser sector have been quietly lobbying the government against what they see as discriminatory rationing.

More worrying for Dawood Hercules is the fact that the last quarter tend to be the most profitable for fertiliser companies as farmers buy urea for the winter planting season. Yet winter is also the time when the gas shortage hits its peak, resulting in an absolute shut down of all fertiliser plants on the Sui Northern Gas Pipelines network, including Dawood Hercules.

Gas supply to Dawood Hercules was shut down on December 10 and the government has yet to announce when the supply will be resumed, though the shutdown is expected to last for the entirety of the winter, when most domestic consumers use gas-fired heaters in their homes.

The bankers involved in the transaction, however, do not appear to be worried, offering Dawood Hercules roughly the same interest rate that they offered five years ago, when the entire economy was booming.

“This is a five year financing facility. We anticipate that over that period of time, the gas issue will have been resolved,” said one banker involved in the transaction, who asked not to be identified.

Another reason for the bankers’ confidence may be that the fertiliser manufacturers’ parent company – the Dawood Hercules Corporation – has pledged that it will back the loan. Neither the parent nor the subsidiary is currently rated by either of the two credit rating agencies in Pakistan.

The Dawood Hercules Corporation is the new holding company created for what was formerly known as the Dawood Group, whose major shareholder is Hussain Dawood, patriarch of the famous Dawood family and one of the richest men in Pakistan.

The group owns several other interests across several sectors such as textiles, computer assembly and services, wind power, energy conservation, investment banking and securities brokerage, and private equity. The company is also the largest shareholder in another fertiliser manufacturer: the Engro Corporation.

Published in The Express Tribune, January 10^th, 2012.