The Pakistan Credit Rating Agency Limited

STRUCTURED FINANCE RATING

KARACHI ELECTRIC SUPPLY COMPANY LIMITED

APRIL 2012

The Pakistan Credit Rating Agency Limited

STRUCTURED FINANCE

KARACHI ELECTRIC SUPPLY COMPANY LIMITED

REPORT CONTENTS
Summary Report Detailed Report:
   

PAGE
1 2 2 4 7

Rating Profile Instrument Structure Assessment

ANNEXURES
BoD Profile Standard Rating Scale I II

April 2012

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RATINGS (APRIL 2012) KARACHI ELECTRIC SUPPLY COMPANY LIMITED [KESC]

RATING RATIONALE & KEY DRIVERS


SECURED, RATED, LISTED TFC (I) OF PKR 300MLN TFC (II) OF PKR 1,200MLN TFC (III) OF PKR 500MLN

PRELIMINARY AA AA AA

TFC (I) Tenor Issue size (PKR mln) Greenshoe option Profit Rate Profit payment Principal repayment

TFC (II)

TFC (III)

13 months 36 months 60 months 300 13.00% Monthly Bullet 1,200 700 14.75% Quarterly Bullet 500 300 15.50% Quarterly Bullet

ANALYSTS
Samiya Mukhtar +92 42 35869504 samiya@pacra.com

Rana Muhammad Nadeem +92 42 35869504 nadeem@pacra.com

The rating primarily draws its strength from the security structure of the instrument. This includes, inter alia, first parri passu charge with 1.2x minimum throughput of receivables from specific 250 corporate consumers and first pari passu charge with 1.2x minimum throughput of excess proceeds (after meeting certain pre-agreed financial obligations) entitled to KESC relating to consumer bills collections of 495 specific entities. The amounts so received would be directly deposited into Debt Payment Account (DPA), which will be gradually built over a period prior to each repayment date to avoid pressure on any single month. Scenario analysis depicts that cashflow coverages are expected to remain strong throughout the life of the instrument. This structure has created a distinction in the instrument from the risks that the issuer is generally exposed to in the normal course of business. Nevertheless, volatile domestic socio-political environment may exert some pressure on the issuer to re-prioritize its obligations though its impact on the bond performance is expected to remain limited.  The rating is dependent on the continued compliance with the predefined security structure of the instrument. Moreover, any significant deterioration in the performance of KESC, impacting the projected collection stream, would have negative implications for the rating. INSTRUMENT STRUCTURE  Karachi Electric Supply Company Limited (KESC), a vertically-integrated power utility, is involved in the generation, transmission and distribution of electric energy to industrial, commercial, agricultural and residential consumers in Karachi and its adjacent areas. KESC, for the purpose of meeting its working capital requirements, is issuing three Secured, Rated, Listed Term Finance Certificates (TFCs) having tenors of 13, 36, and 60 months respectively. The total issue size of the TFCs amounts to PKR 2,000mln (including a greenshoe option of PKR 1,000mln). The instruments carry a put option which would be subject to a service charge of which the extent varies according to the lapsed time.  Security: The TFCs holders would be repaid through collections emanating from specific (carved out) customers. The security is categorized in two classes: (I) First parri passu charge on designated receivables from specific 250 corporate consumers being the amounts paid or to be paid by them to KESC under the consumer bills, (II) First parri passu charge on excess proceeds entitled to KESC’s account relating to consumer bills collections of 495 specific entities through the Master Collection Account (MCA) Agreement dated June 25, 2007 executed between KESC and senior lenders. It may be noted that the receivables accruing from specific 250 corporate entities will also be shared on pari passu basis with another Financing Facility of up to PKR 3,000mln being obtained by KESC. Following this, no further charge will be created on specific 250 customers and on excess proceeds from 495 specific customers.  DPA Mechanism: Irrevocable and unconditional standing instructions will be issued to the specific 250 corporate customers to deposit payments in designated collecting bank(s). These bank(s) will then transfer the amounts to Main Collection Bank, while excess proceeds from the 495 MCA account after paying existing debt of senior lenders, will be transferred directly to the DPA being maintained by the Collecting Bank. Entrapment of funds in the DPA will be done, on an equal monthly basis starting three months prior to the due date, for an amount of the next quarterly payment – with the exception of the principal payment of TFC (II) of PKR 1,200mln for which entrapment will start over a period of 12 months prior to the payment date. The DPA is expected to maintain a minimum 1.2x throughput margin (of monthly interest due plus required principal entrapment) for any given quarter throughout the tenor of the issues. The excess amount, if any, will be transferred to KESC. Payment is then made to TFC holders on due payment dates. Principal redemption will be in bullet form as per each TFCs scheduled date.  In the event collections fall below the desired build-up, a notice would be sent to KESC to meet shortfall within 3 days of the issuance of the notice. If such an event repeats itself in the following 5 months, KESC would add new accounts to the security structure in order to meet 1.2x minimum throughput requirement. These new accounts are expected to match the credit profile of the original pool of customers. ASSESSMENT  In order to arrive at a conservative forecast for monthly cash inflows emanating from both receivable classes, the minimum monthly electricity billing units for each month and minimum collection ratios for these respective months as observed over the last three years ('08-'10) were used as a base to calculate 'minimum monthly collection forecasts' for each set of receivables individually. These amounts are matched with the required build-up in the DPA (inclusive of 1.2x throughput margin) for upcoming cash outflows pertaining to the TFC payments and other payments accruing from other loan facilities. For the 250 corporate customers class, a minimum coverage arising at any point in time during the life of the instrument of 0.9x was observed using this methodology, while the minimum coverage for the 495 MCA class was 1.2x.  In an alternate scenario, average monthly units for each month and average collection ratios for these respective months as observed over the same time period were used to estimate 'average monthly collection forecasts'. Under this method, a minimum coverage of 1.2x was observed for the 250 corporate customer class, while the same coverage for the 495 MCA receivables jumped up to 8.8x.  Overall, collections emanating from both receivable classes provide a cumulative minimum and average coverage of 2.3x and 10.9x respectively. These metrics, computed on the basis of conservative estimates, are considered to provide very strong cover for committed payments to TFCs holders throughout the life of the instrument.  KESC is exposed to certain risks which could negatively impact the performance of the company. The use of minimum monthly consumption to project future monthly inflows captures both the effect of seasonality as well as low demand levels. Meanwhile, credit risk is mitigated to a large extent by taking the minimum collection ratio for projecting future cash flows and a diverse sectoral distribution of carved out customers with low top ten client concentration. The DPA is structured in a way that the requisite cash flow is retained/ built-up for each upcoming payment, eliminating liquidity risks. As the securitization process represents an assignment of receivables, a distinction has been created in the instrument from the risks that the issuer is generally exposed to in the normal course of business. Further, statutory protection provided to foreign investment under Protection of Economic Reforms Act, 1992 shields the company from political risks that could potentially influence the company. Nevertheless, disruptions attributable to Force Majeur circumstances remain a concern for both KESC as well as TFC holders.

PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any error in such information. None of the information in this document may be copied or otherwise reproduced, stored or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s written consent. Our reports and ratings constitute opinions, not recommendations to buy or to sell.

Tel: +92 (42) 35869504

Fax: +92 (042) 35830425

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PRELIMINARY The ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

1. RATINGS Very Strong credit quality

Secured, Listed TFCs TFC (I) of PKR 300 mln TFC (II) of PKR 1,200 mln TFC (III) of PKR 500 mln AA AA AA

2. PROFILE Vertically integrated power utility having exclusive right of power distribution in Karachi Majority owned by foreign shareholders Twelve member board dominated by Abraaj executives

2.1 Karachi Electric Supply Company Limited (KESC), a vertically-integrated power utility, was incorporated in 1913, and is involved in the generation, transmission and distribution of electric energy to industrial, commercial, agricultural and residential consumers in Karachi and its adjacent cities. The company was nationalized in 1952 but was re-privatized on November 29, 2005. KESC employs over 11,000 employees and is listed on all three stock exchanges of the country. 2.2 KESC own installed capacity is 2,381 MW. The company’s dependable generation capacity is as follows:- Own: 2052 MW including BQPS II: Imports: 1012 MW. The company’s transmission network comprises 220KV, 132KV, and 66KV transmission lines, 61 grid stations and 127 power transformers. KESC grid is inter-connected with the NTDC grid system through two double circuit 220 KV transmission lines. KESC’s distribution system comprised 19,890 km of overhead and underground cables at end-FY11. The system consists of four regions further subdivided into distribution centers. The transmission and distribution losses stood at 30.6% during 1HFY12 as compared to 31.7% in 1HFY11. During 1HFY12, KESC provided 15,598 (FY11: 18,962) new connections, equivalent to a total of 108MW (FY11: 207MW) in terms of load. 2.3 Going forward, the company is planning to unbundle the key divisions Generation, Transmission, and Distribution into three different companies (GENCO, TRANSCO, and DISCO). Currently the company is KESC | Stock Price Trend 5.0 40,000 performing initial 4.5 assessment of the 35,000 4.0 unbundling process. 30,000 3.5 This exercise 25,000 3.0 includes valuation 20,000 2.5 of independent 2.0 15,000 entities and a 1.5 comparison of 10,000 1.0 integrated model 5,000 0.5 vs. unbundled model on overall Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 efficiency of KESC. Volume KESC KSE-100
Volume in '000

2.4 The company's scrip has started picking up lately. This can be attributed to improving performance of the company. Currently the stock is outperforming KSE-100 Index. Though free float of the company is very small, historically the unsubscribed portion of right issue has been duly subscribed by KES Power. 2.5 KPMG Taseer Hadi & Co, Chartered Accountants, are auditors of KESC. They expressed an unqualified opinion on company's accounts for the year ending June 30, 2011 and for the reviewed accounts for 1HFY12. At the same time, they have drawn attention to the following matters a) high transmission & distribution losses, b) treatment of redeemable capital as equity, and c) discontinuation of accrual of interest on related KARACHI ELECTRIC SUPPLY COMPANY LIMITED (KESC)
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receivables and payables due to inter corporate debt situation. 2.6.1 Following privatization of the company in 2005, foreign KESC | Ownership Structure investors, namely Al-Jomaih Group (AJG), and National Industrial Group (NIG), acquired Public a 73% stake in KESC through its 1.6% Abraaj holding company – KES Power Capital Limited (KESP). In 2008, these 50% KES Power 72.7% investors approached Abraaj GoP Al Jomaih, Capital to participate in equity 25.7% Saudi Arabia stake of KESC through majority 30% control in holding company – NIG, Kuwait 20% KESP. Subsequently, in September 2008, KESP entered into an agreement with Abraaj and Abraaj acquired equity stake in KESP. Furthermore, KESC entered into an Amendment Agreement (AA) with the GoP in April 2009, in accordance with the GoP’s desire for increased public-private partnership in previously state-held institutions. At that time Abraaj committed to inject US$361mln in KESC over a period of three years. Ever since, KESP has invested US$ 300mln in the equity of KESC, through a series of right issues, and currently owns 72.7% stake in the company followed by the GoP with ~25.66% stake. KESP has lately remitted US$ 61mln as advance share subscription to its portion of fifth right issue while the GoP has undertaken to fully subscribe to its 26% portion in an amount of PKR 1,886mln. KESC has announced its fifth 9.2% right issue at par in Feb-12. Post subscription, total equity injected through KES Power (by Abraaj) would reach US$361mln. 2.6.2 Abraaj Capital is the biggest private equity group in the Middle East, employing over 150 professionals and managing over US$ 6bln in assets under management as of Dec11. The firm follows a 'Buy and Build' investment strategy where the aim is to acquire controlling or significant interests with board representation in stable, mature, well-managed businesses and create value through operational and financial improvements, management incentives and the use of leverage. The current investments of the company include Air Arabia, BMA Capital Management, Byco (formerly Bosicor Limited), Orascom Construction, and Spinneys Holdings, while notable past investments include Amwal Financial Services, Egyptian Fertilizer Company, and National Air Services Saudi Arabia. The company manages these investments through funds created specifically for the purpose of making pooled investments along with other shareholders. Abraaj, having a majority share in the holding company, acquired its stake under an Amendment Agreement to Implementation Agreement signed with the GoP during 2009. The company has fulfilled its commitment and has injected ~US$ 361mln by April 2012. Continuous financial and operational commitment from the sponsor remains important till the time the company starts strengthening its financial profile on a standalone basis. 2.6.3 Al-Jomaih Group, based in Saudi Arabia, is one of the recognized business conglomerates with interest in corporate and financial; services sectors. General Motors and Shell International are the key affiliates of this group. National Industries Group (NIG), Kuwait is also one of the largest industrial companies in Middle East. 2.7 Governance: KESC’s board of directors comprises twelve members including the CEO, Mr. Tabish Gauhar. The board is majority controlled by KESP, with a total of KARACHI ELECTRIC SUPPLY COMPANY LIMITED (KESC)
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eight nominated members, while also encompassing key executive positions including the CEO and the chief advisor. Meanwhile, the GoP has three representatives. A brief profile of the BoD is enclosed as Annexure I. 2.7.1 There are currently four committees at the board level, namely Audit, Finance, Human Resource and Technical Committees. Each committee is headed by a board member and consists of other board members. Though the attendance of GoP nominated directors has remained limited, KSEP nominated directors actively participate in BoD meeting and all meetings comprehensively capture the key risk and performance areas of the company. 2.8 Organizational Structure: Following takeover, a new management team was installed by Abraaj, which includes the CEO – Mr. Tabish Gauhar, a partner at Abraaj Capital. Further, the sponsors reorganized the organizational structure of KESC dividing it into three main functional areas, namely (I) Generation, (II) Transmission, and (III) Distribution. These divisions are headed by experienced professionals. Meanwhile, support functions such as Finance, Marketing, and HR, are centralized at company level and are headed by professionals having considerable experience in their respective fields. Furthermore, KESC has constituted several strategic divisions – Supply Chain, Corporate Strategy, Health Safety and Environment, and Special Projects - which aids in the execution of overall company strategy. Each division Head reports directly to the CEO, with the exception of Internal Audit, who would report to the Board. Currently this position is vacant. Senior management utilized the MIS generated through its systems and meets frequently to discuss key issues/progress through defined “Leaders” meetings. 3. INSTRUMENT STRUCTURE Three Secured, Rated, Listed TFCs amounting to PKR 2,000mln Secured against collections emanating from specific (carved out) customers DPA to be builtup on monthly basis for upcoming payment while maintaining 1.2x throughput margin Instrument(s): KESC, for the purpose of meeting its working capital requirements, is issuing three Secured, Rated, Listed Term Finance Certificates (TFCs) having tenors of 13, 36, and 60 months respectively. The total issue size of the TFCs amounts to PKR 2,000mln (including a greenshoe option of PKR 1,000mln) and is to be offered to the general public under the brand name of “Azm” each set having an aggregate face value of PKR 5,000/- or in multiples thereof. These will be the first listed TFCs issued by Karachi Electric Supply Company Limited. 3.2 The salient features of the TFCs are given as follows:
3.1
Instrument Tenor Issue Amount (PKR mln) Greenshoe option Profit Rate Profit Payment Principal Redemption Purpose TFC (I) 13 months 300 13% Monthly Bullet TFC (II) 36 months 1,200 700 14.75% Quarterly Bullet TFC (III) 60 months 500 300 15.5% Quarterly Bullet

To meet KESC's working capital requirements

3.3

Security: The TFCs holders would be repaid through collections emanating from specific (carved out) customers. The security is categorized in two classes: (I) First parri passu charge with 1.2x minimum throughput on designated receivables from specific 250 corporate consumers being the amounts paid or to be paid by them to KESC under the consumer bills, (II) First parri passu charge with 1.2x minimum throughput on excess proceeds entitled to KESC’s account relating to consumer bills collections of 495 specific entities through the Master Collection Account (MCA) Agreement dated June 25, 2007 as amended from time to time and executed between KESC and other senior lenders. This also includes lien on KESC’s present and future right to receive excess amounts under the MCA Agreement along with lien over accounts of KESC where such excess amounts will be deposited.
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It may be noted that the above mentioned receivables accruing from specific 250 (carved out) corporate entities will also be shared on pari passu basis with another Financing Facility of up to PKR 3,000mln being obtained by KESC. Following this, no further charge will be created on specific 250 corporate customers and on excess cash proceeds from 495 specific customers. 3.3.2 The waterfalls for each TFCs are given as follows:
3.3.1
350 300 250 200 150 100 50 0 TFC (I) Waterfall 350 300 250 200 150 100 50 0

PKR in mln

Year 1 – P10

Year 1 – P11

Year 1 – P12

Year 1 – P1

Year 1 – P2

Year 1 – P3

Year 1 – P4

Year 1 – P5

Year 1 – P6

Year 1 – P7

Year 1 – P8

Year 1 – P9

Principal Outstanding Mark-up

Principal Repayment Installment Due (I+P)

600 500

TFC (III) Waterfall

Year 2 – P1

600 500 400 300 200 100 0

PKR in mln

400 300 200 100 0

3.4

Debt Payment Account (DPA) Mechanism: The collections from the specific 250 (carved out) corporate customers will be assigned to the DPA maintained by the Main Collection Bank (Standard Chartered Bank (Pakistan) Limited) from the designated collecting bank(s), while coverages and throughput will be monitored by the Trustee (Pak Brunei Investment Company Limited). Collections will be ensured by providing a differentiated bill to each customer carved out, along with irrevocable and standing unconditional instructions for the deposit of these bills in the specific designated collecting bank(s). These collecting bank(s) will then transfer these amounts to the Main
Page 5 of 12 www.pacra.com KARACHI ELECTRIC SUPPLY COMPANY LIMITED (KESC)
April 2012

Year 1 – P1 Year 1 – P2 Year 1 – P3 Year 1 – P4 Year 2 – P1 Year 2 – P2 Year 2 – P3 Year 2 – P4 Year 3 – P1 Year 3 – P2 Year 3 – P3 Year 3 – P4 Year 4 – P1 Year 4 – P2 Year 4 – P3 Year 4 – P4 Year 5 – P1 Year 5 – P2 Year 5 – P3 Year 5 – P4

Principal Outstanding Interest

Principal Repayment Installment Due (I+P)

PKR in mln

PKR in mln

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Collection Bank, while excess proceeds after paying existing first charge holders emanating from the 495 MCA account, currently being maintained by UBL, will be transferred directly to the DPA. Based on the instructions of the Trustee, the Main Collection Bank, in-turn, will entrap funds in the DPA on a monthly basis being at a minimum 1/3 of the amount to fall due by the end of each quarter – with the exception of the principal payment of TFC (II) of PKR 1,200mln for which entrapment will start over a period of 12 months prior to the payment date. While the Trustee will monitor a fund flow coverage of 1.2x throughput for any given quarter throughout the tenor of the Issue, the DPA is liable to entrap a minimum 1.0x amount of monthly interest due plus required principal entrapment. For example, if an upcoming quarterly payment amounts to PKR 500mln (interest plus principal due), the Trustee will ensure a minimum of PKR 200mln inflows are received (after accounting for 1.2x throughput), of which PKR 166.7mln will be entrapped in the DPA every month starting three months prior to the due date. The excess amount, if any, will be transferred to KESC operating interest-bearing account. The payment is then made to the TFC holders on due payment dates. Principal redemption will be in bullet form as per each TFCs scheduled date. It is important to note that the repayment of loan advanced by senior lenders of 495 MCA would not reduce the excess proceeds emanating from 495 specific entities allocated to the TFCs repayment. The following flow-chart illustrates the pass through mechanism, ensuing funds flows as explained above:
Pass‐through Mechanism Trustee [Pak Brunei] Collection Bank(s) A
Collections from consumer bills from specific 250 corporate consumers transferred to DPA

Payment to TFC holders upon instructions of Trustee

B

Main Collecting Bank [SCB(P)L]

TFCs Holders

C

Amounts retained in DPA equal to next quarterly payment after accounting for 1.2x throughput margin

UBL
Excess of 495 MCA customers transferred directly to DPA by UBL; the collected for the 495 MCA account Proceeds in excess of the build‐up required in the DPA transferred back to KESC

KESC

Stage 1

Stage 2

Stage 3

Covenants: The Trustee is mandated to exercise vigilance in monitoring throughput to detect any shortfall in receivables, if arising. In the event the collections fall below the desired build-up amount, a notice would be sent to KESC to meet shortfall within 5 days of the issuance of the notice. If such an event repeats itself in the following 5 months, KESC would add new carved out customer accounts to the security structure in order to meet 1.2x minimum throughput requirement. 3.6 Put Option: Investors have the option to prematurely redeem the outstanding TFCs at any point subject to a service charge of which the extent varies according to the
3.5

KARACHI ELECTRIC SUPPLY COMPANY LIMITED (KESC)
April 2012

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lapsed time. Repayment of any redemption call would be within 15 days of the request being received. For this, a minimum cushion of PKR 1,000mln in the form of unutilized short-term lines by KESC would be kept at all points in time. If the cushion falls below this, KESC would notify the same to the Trustee along with a curing plan of not more than 15 days. 4.ASSESSMENT Industrial & commercial customers constitute 49% of revenue Seasonality effect in unit consumption Strong coverages observed over the life of the instrument, despite conservative estimates Security structure has created a distinction between the bond and risks of issuer 4.1 KESC is the only fully vertically integrated power utility provider having exclusive rights for distributing electricity to Karachi and its adjoining areas. The company has a registered customer base of ~2.2 million, of which 77% constitute residential households, 22% commercial, and the remaining 1% comprise industrial and agricultural customers. However, in terms of revenue, residential customers account for only 43% of total income, while industrial and commercial consumers account for a combined 51% of revenue. This is due to the heavy consumptive requirements of industrial consumers, as well as a significant portion of supply leakage and considerable bill collection inefficiency of residential customers. The company's distribution set-up consists of four regions further sub-divided into distribution centres. The total amount billed to all regions for 1HFY12 was PKR 45.1 billion; an increase of 6% compared to the same period last year. Meanwhile, Transmission & Distribution (T&D) losses stood at 30.6% for the same period; an improvement of 1.6% points versus the losses witnessed in the last year. This is an outcome of the new management's efforts to remove bottlenecks from the transmission system as well as focussing on reducing electricity theft through various initiatives.
4.1.1 In an effort to reduce the incidence of theft, KESC formulated the “Integrated Business Center (IBC)” responsible for the implementation of an Energy Management System, regularization of illegal connections, and media campaigns. The company has also commissioned eight new grid stations, added 11 new High Tension transmission circuits while rehabilitating 76km of network lines in order to reduce T&D losses since 2008. On the generation front, ~450MW (28.4% of current gross dependable capacity) has been added during the period 2008-2011. However, during this period growth in demand outpaced the addition in supply resulting in a power shortfall in the city. The shortfall had been exacerbated by progressive de-rating of the existing assets.

4.2 The company faces a peak demand of 2,562MW, although this varies greatly due to the effect of seasonality. A look into the seasonality trend of units consumed reveals heavy demand during the summer season – attributable to increased air conditioning requirements and longer day durations. Demand for electricity is seen to peak during the months of MayAug, gradually tapering off and hitting lows in the month of Dec-Jan. Given below are the consumption histories of the 250 corporate customers and 495 MCA customers specifically earmarked for the purpose of the proposed instruments:

KARACHI ELECTRIC SUPPLY COMPANY LIMITED (KESC)
April 2012

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KESC | 250 Corporate customers | Units Consumed History

STRUCTURED FINANCE
KESC | 495 MCA| Units Consumed History 200

35
Units Consumed (mln)

30

Units Consumed (mln)
Ma y Ma r Aug Apr Sept Ja n Feb Jun Jul Nov Dec Oct

180 160 140 120 100

25

20

15

Mar

Jan

May

Jun

Jul

Aug

2009

2010

2011

2009

2010

4.3 Specific 250 corporate (carved out) customers: These customers mainly comprise small and medium size entities having a strong track record for timely bill payment. The client list is reasonably diversified with Textiles (23%), Food & Allied (19%), and Heavy Industries (17%) constituting the majority of the sectoral mix. Further, top 10 customers comprised 15% of total receivables and top 25 customers comprised 25% of total receivables – indicative of low concentration risk. The clients have exhibited strong payment history, with the average Collection Ratio (percentage of amount collected versus amount billed) coming to ~100% over the last three years, although this metric has dropped to a low of 86% in certain months. The number of units consumed by these customers achieved a cumulative average growth of 6.1% during the last three years (09-11). The consumption and collection history of the same over the last three years are given in the table below:
PKR (mln) Average Monthly Units Consumed (kWh) Minimum Monthly Units Consumed (kWh) Average Monthly Tariff Average Collection Ratio Minimum Collection Ratio Average Monthly Collection Minimum Monthly Collection 2011 27.4 23.4 11.2 98% 86% 307.2 272.1 2010 29.7 26.3 8.6 99 % 97 % 306.3 262.3 2009 27.0 20.2 7.0 100 % 94 % 231.7 175.7

4.3.1 In order to arrive at a conservative forecast for future monthly cash inflows emanating from the 250 customer class, the minimum monthly units for each month and minimum collection ratios for these respective months as observed over the period between Jan2008 to Dec2011 were used as a base to calculate 'minimum monthly collection forecasts'. Average monthly tariff for the latest year (CY11) was assumed for calculating the monthly collections forecast. These amounts were matched with the required build-up in the DPA (1.0x throughput) for upcoming cash outflows pertaining to the TFC payments, as well as payments on the proposed financing facility of PKR 3,000mln to be obtained by KESC against the same set of receivables, in order to assess cash flow coverages. A minimum coverage of 0.9x was observed using this methodology.

KARACHI ELECTRIC SUPPLY COMPANY LIMITED (KESC)
April 2012

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2011

Nov

Dec

Apr

Feb

Oct

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4.3.2 In another scenario, average monthly units for each month and average collection ratios for these respective months as observed over the last three years were used to estimate 'average monthly collection forecasts'. The tarrif assumed for the first scenario was also used in the second scenario. A minimum coverage of 1.2x was observed using this average monthly inflows methodology. 4.3.3

The following chart represented a graphical illustration of the coverages trend for the specific 250 corporate customers for the purpose and life of the instrument.
250 corporate customers | Coverages Chart
1,500 5

1,200

4

PKR in mln

900

3

600

2

300

1

0 1 5 9 13 17 21 25 29 33 37 41 45 49 53 57

0

TFCs Outflow Coverage [minimum forecasts]

Buildup Required Coverages [Average forecasts]

Specific 495 MCA (carved out) customers: Excess amounts, after accounting for payments to senior lenders who have the first right to proceeds emanating from the specific 495 MCA customers, are the secondary source of inflows through which TFCs payments will be met. These customers have also displayed a strong payment history and mostly comprise medium sized corporates. The consumption and collection history of the same over the last three years are given in the table below:
PKR (mln) Average Monthly Units Consumed (kWh) Minimum Monthly Units Consumed (kWh) Average Monthly Tariff Average Collection Ratio Minimum Collection Ratio Average Monthly Collection Minimum Monthly Collection 2011 161.4 131.1 10.5 99.1% 93.2% 1622.7 1,407.5 2010 157.7 135.8 8.0 99.0 % 92.9 % 1,554.6 1,240.3 2009 144.0 119.5 6.5 97.5 % 79.6 % 1,123.0 941.3

4.3.4 The excess proceeds emanating from these 495 MCA customers are after payments have been made on the facility provided by senior lenders. The facility encompasses a peak quarterly payment of PKR 3,200mln – although this would only be reached for the quarter ended Sept12. Average monthly tariff for the latest year (CY11) for 495 MCA customers was assumed for calculating the monthly collections forecast. Similarly, using the same minimum monthly collection forecast basis and assuming a peak quarterly payment throughout the life of the instruments for the purpose of added prudence, a minimum coverage of 1.2x was observed under this methodology. 4.3.5 In an alternate scenario, average monthly collection amounts were forecasted and an average quarterly payment of PKR 2,547mln was assumed over the relevant life of instrument. The coverage significantly improves to 8.8x under the averages method owing mainly to the substantial boost provided by the assumption of an average quarterly payment to senior creditors throughout the TFCs life. 4.3.6

The following chart represented a graphical illustration of the coverages trend for the specific 495 MCA corporate customers for the purpose and life of the instrument.
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Coverage (x)

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495 MCA [Excess proceeds] | Coverages Chart
301 241 181 121 61 1

1,500 1,200

900 600 300 0

1

5

9 13 17 21 25 29 33 37 41 45 49 53 57
Buildup Required Coverages [average forecasts]

TFCs Outflow Coverages [minimum forecasts]

4.4 Overall, the collections emanating from both receivable classes provide a cumulative minimum and average coverage of 2.3x and 10.1x respectively. These metrics, computed on the basis of conservative estimates, are considered to provide very strong cover for committed payments to TFCs holders throughout the life of the instrument. It is pertinent to note that in the event collections fall below the desired buildup, a notice would be sent to KESC to meet shortfall within 3 days of the issuance of the notice. If such an event repeats itself in the following 5 months, KESC would add new accounts to the security structure in order to meet 1.2x minimum throughput requirement. The following table provides the precise matching of cash inflows and outflows along with accompanying coverages:

KARACHI ELECTRIC SUPPLY COMPANY LIMITED (KESC)
April 2012

Page 10 of 12 www.pacra.com Coverage (x)

PKR in mln

The Pakistan Credit Rating Agency Limited
Loan and TFC Payments Loan: 3,000 mln Principal Outs. Markup Y1-M1 Y1-M2 Y1-M3 Y1-M4 Y1-M5 Y1-M6 Y1-M7 Y1-M8 Y1-M9 Y1-M10 Y1-M11 Y1-M12 Y2-M1 Y2-M2 Y2-M3 Y2-M4 Y2-M5 Y2-M6 Y2-M7 Y2-M8 Y2-M9 Y2-M10 Y2-M11 Y2-M12 Y3-M1 Y3-M2 Y3-M3 Y3-M4 Y3-M5 Y3-M6 Y3-M7 Y3-M8 Y3-M9 Y3-M10 Y3-M11 Y3-M12 Y4-M1 Y4-M2 Y4-M3 Y4-M4 Y4-M5 Y4-M6 Y4-M7 Y4-M8 Y4-M9 Y4-M10 Y4-M11 Y4-M12 Y5-M1 Y5-M2 Y5-M3 Y5-M4 Y5-M5 Y5-M6 Y5-M7 Y5-M8 Y5-M9 Y5-M10 Y5-M11 Y5-M12 3,000.0 3,000.0 2,850.0 2,850.0 2,850.0 2,700.0 2,700.0 2,700.0 2,550.0 2,550.0 2,550.0 2,400.0 2,400.0 2,400.0 2,250.0 2,250.0 2,250.0 2,100.0 2,100.0 2,100.0 1,950.0 1,950.0 1,950.0 1,800.0 1,800.0 1,800.0 1,650.0 1,650.0 1,650.0 1,500.0 1,500.0 1,500.0 1,350.0 1,350.0 1,350.0 1,200.0 1,200.0 1,200.0 1,050.0 1,050.0 1,050.0 900.0 900.0 900.0 750.0 750.0 750.0 600.0 600.0 600.0 450.0 450.0 450.0 300.0 300.0 300.0 150.0 150.0 150.0 Sum of cash flows Minimum Coverage at any point in time 120.0 114.0 108.0 102.0 96.0 90.0 84.0 78.0 72.0 66.0 60.0 54.0 48.0 42.0 36.0 30.0 24.0 18.0 12.0 6.0 Principal Repay 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 150.0 Principal Outs. 2,000.0 1,999.9 1,999.5 1,999.5 1,999.4 1,999.0 1,999.0 1,998.9 1,998.5 1,998.4 1,998.4 1,998.0 1,698.7 1,698.7 1,698.4 1,698.4 1,698.4 1,698.0 1,698.0 1,698.0 1,697.7 1,697.7 1,697.7 1,697.3 1,697.3 1,697.3 1,697.0 1,697.0 1,697.0 1,696.7 1,696.7 1,696.7 1,696.3 1,696.3 1,696.3 498.9 498.9 498.9 498.8 498.8 498.8 498.7 498.7 498.7 498.6 498.6 498.6 498.5 498.5 498.5 498.4 498.4 498.4 498.3 498.3 498.3 498.2 498.2 498.2 0.1 TFC: 2,000 mln [Proposed, Rated] Principal Markup Total Outflow Repay 3.3 0.1 3.3 3.2 0.1 3.3 66.9 0.4 337.3 3.2 0.1 3.3 3.2 0.1 3.3 66.9 0.4 331.3 3.2 0.1 3.3 3.2 0.1 3.3 66.8 0.4 325.2 3.2 0.1 3.3 3.2 0.1 3.3 66.8 0.4 319.2 3.2 299.3 302.5 63.6 0.3 309.9 63.6 0.3 303.9 63.5 0.3 297.9 63.5 0.3 291.9 63.5 0.3 285.9 63.5 0.3 279.9 63.5 0.3 273.8 63.5 1,197.5 1,464.9 19.3 0.1 217.4 19.3 0.1 211.4 19.3 0.1 205.4 19.3 0.1 199.4 19.3 0.1 193.4 19.3 0.1 187.4 19.3 0.1 181.4 19.3 498.1 673.4 7,219.4

STRUCTURED FINANCE
Receivable From: 250 customers [ Standalone Coverage] Monthly min Monthly Avg Coverage Receivable Receivable 243.6 300.6 2.1 280.4 303.3 2.4 254.4 301.6 2.2 234.4 277.6 2.1 249.0 310.8 2.2 259.6 298.4 2.3 174.1 1.6 222.7 234.8 265.1 2.1 250.2 271.9 2.3 248.7 288.0 2.3 284.8 315.3 1.4 273.8 316.5 1.3 243.6 300.6 1.2 280.4 2.7 303.3 254.4 301.6 2.5 234.4 277.6 2.3 249.0 310.8 2.5 298.4 259.6 2.6 174.1 222.7 1.8 234.8 2.4 265.1 250.2 2.5 271.9 248.7 288.0 2.6 315.3 284.8 2.9 273.8 316.5 2.8 243.6 1.2 300.6 280.4 303.3 1.4 254.4 301.6 1.3 234.4 277.6 1.2 249.0 310.8 1.3 259.6 298.4 1.3 174.1 222.7 0.9 234.8 1.2 265.1 250.2 271.9 1.3 248.7 288.0 1.3 284.8 315.3 1.5 273.8 316.5 1.4 243.6 300.6 3.4 280.4 303.3 3.9 254.4 3.5 301.6 234.4 277.6 3.3 249.0 310.8 3.5 259.6 298.4 3.7 174.1 222.7 2.5 265.1 234.8 3.4 250.2 3.7 271.9 248.7 3.7 288.0 284.8 315.3 4.3 273.8 316.5 4.1 243.6 300.6 3.8 280.4 303.3 4.3 254.4 301.6 3.9 234.4 3.8 277.6 249.0 4.0 310.8 259.6 298.4 4.2 174.1 222.7 2.9 234.8 265.1 3.9 250.2 271.9 4.1 248.7 288.0 1.1 284.8 1.3 315.3 273.8 316.5 1.2 495 MCA [ Excess] [ Standalone Coverage] Monthly Avg Monthly min Coverage Receivable Receivable 504.7 20.5 1,666.3 149.4 1,454.6 6.1 432.4 17.6 1,587.3 189.5 1,365.1 7.7 213.7 1,381.7 8.7 339.0 13.8 1,456.4 166.0 6.7 1,357.9 266.9 10.8 1,361.5 346.3 14.1 1,457.9 387.7 15.8 1,517.5 452.1 1,513.4 3.6 393.3 1,600.7 3.2 504.7 1,666.3 4.1 149.4 7.0 1,454.6 432.4 20.3 1,587.3 189.5 1,365.1 8.9 213.7 10.0 1,381.7 339.0 15.9 1,456.4 166.0 1,357.9 7.8 266.9 12.5 1,361.5 346.3 16.3 1,457.9 387.7 18.2 1,517.5 452.1 21.2 1,513.4 393.3 18.5 1,600.7 504.7 4.2 1,666.3 149.4 1,454.6 1.2 432.4 1,587.3 3.6 189.5 1,365.1 1.6 213.7 1,381.7 1.8 339.0 1,456.4 2.8 166.0 1,357.9 1.4 266.9 2.2 1,361.5 346.3 1,457.9 2.9 387.7 1,517.5 3.2 452.1 1,513.4 3.7 393.3 1,600.7 3.3 504.7 77.9 1,666.3 149.4 23.1 1,454.6 432.4 66.8 1,587.3 189.5 29.3 1,365.1 213.7 33.0 1,381.7 339.0 52.3 1,456.4 166.0 25.6 1,357.9 266.9 41.2 1,361.5 346.3 53.5 1,457.9 387.7 59.9 1,517.5 452.1 69.9 1,513.4 393.3 60.8 1,600.7 504.7 78.0 1,666.3 149.4 23.1 1,454.6 432.4 66.8 1,587.3 189.5 29.3 1,365.1 213.7 33.0 1,381.7 339.0 52.4 1,456.4 166.0 25.7 1,357.9 266.9 41.3 1,361.5 346.3 53.5 1,457.9 387.7 1,517.5 2.2 452.1 2.6 1,513.4 393.3 1,600.7 2.3 Total Total Minimum Average Coverage Coverage 22.6 70.3 8.5 61.7 19.8 67.1 9.8 57.9 10.9 58.9 16.1 61.8 8.3 57.2 13.0 57.7 16.3 61.7 18.0 64.3 5.0 13.7 4.5 14.4 5.2 14.9 9.7 71.2 22.8 77.4 11.2 66.8 12.5 67.9 18.5 71.3 9.5 66.0 14.9 66.6 18.8 71.2 20.8 74.2 24.2 74.3 21.3 78.4 5.4 15.3 2.7 13.6 4.9 14.7 2.8 12.7 3.1 13.0 4.1 13.6 2.3 12.4 3.4 12.6 4.2 13.5 4.5 14.1 5.2 14.2 4.7 14.9 81.3 261.4 26.9 228.8 70.3 249.3 32.6 214.8 36.5 217.8 56.0 229.2 28.2 213.0 44.7 214.2 57.2 229.2 63.6 238.8 74.1 238.6 64.9 252.1 81.8 262.2 27.4 229.5 70.8 250.0 33.0 215.4 37.0 218.5 56.5 229.9 28.5 213.6 45.1 214.9 57.7 229.9 3.4 10.1 3.9 10.2 3.5 10.7

Build Up Required 114.6 114.6 114.6 112.6 112.6 112.6 110.6 110.6 110.6 108.6 208.4 208.4 206.3 103.3 103.3 101.3 101.3 101.3 99.3 99.3 99.3 97.3 97.3 97.3 195.1 195.1 195.1 193.1 193.1 193.1 191.1 191.1 191.1 189.0 189.0 189.0 72.5 72.5 72.5 70.5 70.5 70.5 68.5 68.5 68.5 66.5 66.5 66.5 64.5 64.5 64.5 62.5 62.5 62.5 60.5 60.5 60.5 224.5 224.5 224.5 7,219.4

Coverage 2.6 2.6 2.6 2.5 2.8 2.6 2.0 2.4 2.5 2.7 1.5 1.5 1.5 2.9 2.9 2.7 3.1 2.9 2.2 2.7 2.7 3.0 3.2 3.3 1.5 1.6 1.5 1.4 1.6 1.5 1.2 1.4 1.4 1.5 1.7 1.7 4.1 4.2 4.2 3.9 4.4 4.2 3.3 3.9 4.0 4.3 4.7 4.8 4.7 4.7 4.7 4.4 5.0 4.8 3.7 4.4 4.5 1.3 1.4 1.4

Build Up Required 24.6 24.6 24.6 24.6 24.6 24.6 24.6 24.6 24.6 24.6 124.4 124.4 124.3 21.3 21.3 21.3 21.3 21.3 21.3 21.3 21.3 21.3 21.3 21.3 121.1 121.1 121.1 121.1 121.1 121.1 121.1 121.1 121.1 121.0 121.0 121.0 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 6.5 172.5 172.5 172.5

Coverage 67.6 59.1 64.4 55.4 56.1 59.1 55.2 55.3 59.2 61.7 12.2 12.9 13.4 68.3 74.5 64.1 64.9 68.4 63.8 63.9 68.5 71.3 71.1 75.2 13.8 12.0 13.1 11.3 11.4 12.0 11.2 11.2 12.0 12.5 12.5 13.2 257.3 224.6 245.1 210.8 213.4 224.9 209.8 210.3 225.2 234.5 233.8 247.3 257.5 224.8 245.3 211.0 213.6 225.1 209.9 210.5 225.4 8.8 8.8 9.3

0.91

1.17

1.23

8.77

2.28

10.08

* Calculations are based on profit rates of Loan :16%, TFC(I): 13%, TFC(II): 14.75%, TFC(III): 15.5%.

4.5 Risk Management: KESC is exposed to certain demand & supply side risks which could prove significant in hindering the functionality of the company, inturn, negatively impacting the performance of TFCs repayments. A discussion of these risks, along with their mitigants, is given as follows: 4.5.1 Demand risk: A drop in the demand for power by the specific carved out customers would lead to lower revenue collected from these customers, which inturn, can run the possibility of breaching the minimum coverage criteria for TFCs repayments. As KARACHI ELECTRIC SUPPLY COMPANY LIMITED (KESC)
April 2012 Page 11 of 12 www.pacra.com The Pakistan Credit Rating Agency Limited

STRUCTURED FINANCE

observed in our analysis, demand for power is seasonal in nature with ensuing cash inflows fluctuating widely on a MoM basis. To cater for this, minimum monthly consumption over the last three years has been used to project future monthly inflows, thus inherently capturing the effect of seasonality as well as permitting the use of conservative estimates which already account for lower demand in the projected values. 4.5.2 Credit Risk: Credit risk emanating from non-payment of dues on part of the specific clients is mitigated to a large extent by a diverse sectoral distribution of carved out customers and low top ten client concentration (250 customers top 10: ~15% of total payments received, 495 MCA top 10: ~25% to total payment received), where the nonpayment of a few customers would not significantly impact the total receivables collected. Moreover, the use of minimum collection ratios in forecasting future receivables already take into account the historically highest non-payment amount observed over the last three years. 4.5.3 Liquidity Risk: In order to manage any timing mismatch arising with regard to collection inflows and payments to TFCs holders, the DPA build-up structure – through entrapment of funds on a monthly basis – has ensured that collections emanating from assigned receivables are sufficient to cater for upcoming payments and avoid pressure on any given single month. This assignment, coupled with a commitment from KESC to bridge any gap arising incase the collections fall below the minimum required build-up levels, provides significant comfort with respect to the bond's performance. 4.5.4 Operational Risk: KESC's internal power generation is dependent on the gas feed and furnace oil received by the company; supply of which remains volatile on account of continuing gas shortages in the country and the on-going circular debt conundrum. In this regard, KESC has also sought an allocation of 276 MMCFD of gas from the ECC to ensure uninterrupted gas supply. The company is also exposed to significant negative externalities, given the volatile domestic socio-political environment of the city of Karachi, which could negatively impact the ability of KESC to supply electricity to its customers, in-turn reducing revenues and constraining the financial profile of the company. However, the security structure for the proposed TFCs, representing an assignment of receivables, has created a distinction in the instrument from the risks that the issuer is generally exposed to in the normal course of business by allocating specific cash flows to the repayment of the TFCs. Moreover, a number of laws, in particular The Protection of Economic Reforms Act, 1992, provides blanket statutory protections to foreign investment from political risks that could influence its performance. Meanwhile planned equity injection from the parent would supplement the financial flexibility of the company. However, it is pertinent to mention that the company and the TFCs holders, still remain exposed to any disruptions arising under Force Majeur circumstances. 4.5.5 Tariff Risk: The collections from customers are assumed to be at an average monthly tariff rate based on latest year data (CY11). Any decrease in tariff can directly impact the absolute number of billed amount and subsequently the collections. Similarly any significant rise in consumer tariff could impact the collection ratio. Both the cases can potentially impact the minimum monthly collection forecast for this structured instrument. However use of latest three years data partially covers the risk of any significant deviation from the original forecast.

KARACHI ELECTRIC SUPPLY COMPANY LIMITED (KESC)
April 2012

Page 12 of 12 www.pacra.com The Pakistan Credit Rating Agency Limited

STRUCTURED FINANCE

Analysts

Samiya Mukhtar +92 42 3586 9504 samiya@pacra.com

Rana Muhammad Nadeem +92 42 3586 9504 nadeem@pacra.com

Disclaimer:
PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any error in such information. None of the information in this document may be copied or otherwise reproduced, stored or disseminated in whole or in part in any form or by any means whatsoever by any person without PACRA’s written consent. Our reports and ratings constitute opinions, not recommendations to buy or to sell.

KARACHI ELECTRIC SUPPLY COMPANY LIMITED (KESC)
April 2012

Page 13 of 12 www.pacra.com ANNEXURE - I
The Pakistan Credit Rating Agency Limited

PROFILE – BOARD OF DIRECTORS: KARACHI ELECTRIC SUPPLY COMPANY LIMITED
Sr. # Participation in BoD Meetings
Length of Association with the Board (Years)

Name of BoD Members

Representation

Occupation and other Key Experience

Committees

1.

Mr. Waqar Hassan Siddique [April 13, 1957]

KES Power

Chairman, KES Power Ltd., Byco Petroleum Pakistan Ltd. (Pakistan), Serves on the boards of BMA Financial Services Ltd. (Pakistan), Abraaj Capital Pakistan Ltd. (Cayman Islands), ADCM Ltd. (Cayman Islands), Gulf Associates Ltd. (Cayman Islands) and others Chief Executive Officer, KESC; Partner, Abraaj Capital ;Director KES Power Limited Serves on the boards of Gulf Marine Maintenance and offshore services LLC-Dubai UAE, Global Education initiative, World Economic Forum and BMA Capital – Pakistan.

-

5/8

3

2.

Mr. Tabish Gauhar [April 26, 1971]

KES Power

-

7/8

3

3.

Mr. Omar Khan Lodhi [January 22, 1970]

KES Power

BFC & BAC BFC & BAC

2/7

1.5

4.

Mr. Shan A. Ashary [December 20, 1956]

KES Power

Investment Adviser, Co.,Saudi Arabia)

Al-Jomaih

Holding

8/8

6

5.

Mr. Naveed Ismail [July 17, 1961]

KES Power

Director, KES Power Limited

BAC

8/8

3.5

6.

Mr. Syed Nayyer Hussain [January 27, 1963]

KES Power

Chief Strategy Officer – Distribution; Principal, Abraaj Capital

BFC & BAC

8/8

3

7.

Mr. Mubasher H. Sheikh [August 7, 1970]

KES Power

Group Financial Controller, National Industries Group, Kuwait

BFC & BAC

7/8

6

8.

Mr. Muhammad Tayyab Tareen [February 20, 1969]

KES Power

Chief Advisor, KESC ; Principal, Abraaj Capital

BFC & BAC

8/8

3

9.

Mr. Syed Arshad Masood Zahidi [November 21, 1968] Mr. Imtiaz Kazi [January 2, 1953] Mr. Muhammad Zargham Eshaq Khan [March 12, 1969] Mr. Naveed Alauddin [November 2, 1964]

KES Power Government of Pakistan Government of Pakistan Government of Pakistan

Chief Strategy Officer – Generation Transmission ; Principal, Abraaj Capital

&

-

8/8

3

10.

Government Service ; Secretary W&P, Ministry of Water & Power, GOP Government Service ; Joint Secretary (Power), Ministry of Water & Power, GOP; Serves on the boards of LESCO, PESCO, HESCO, MEPCO and GEPCO. Government Service ; Joint Secretary (CF-II), Finance Division, GOP; Director of PARCO and PHPL

-

0/2

0.5

11.

-

0/4

1

12.

-

2/2

0.5

KARACHI ELECTRIC SUPPLY COMPANY LIMITED April 2012

www.pacra.com

The Pakistan Credit Rating Agency Limited

STANDARD RATING SCALE & DEFINITIONS
LONG TERM RATINGS
AAA: Highest credit quality. ‘AAA’ ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events. AA: Very high credit quality. ‘AA’ ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events. A: High credit quality. ‘A’ ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. BBB: Good credit quality. ‘BBB’ ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investmentgrade category. BB: Speculative. ‘BB’ ratings indicate that there is a possibility of credit risk developing, particularly as a result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade. B: Highly speculative. ‘B’ ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favourable business and economic environment. CCC, CC, C: High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favourable business or economic developments. A ‘CC’ rating indicates that default of some kind appears probable. ‘C’ ratings signal imminent default. Notes:

SHORT TERM RATINGS
A1+: Obligations supported by the highest capacity for timely repayment.

A1:. Obligations supported by a strong capacity for timely repayment.

A2: Obligations supported by a satisfactory capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic, or financial conditions.

A3: Obligations supported by an adequate capacity for timely repayment. Such capacity is more susceptible to adverse changes in business, economic, or financial conditions than for obligations in higher categories.

B: Obligations for which the capacity for timely repayment is susceptible to adverse changes in business, economic, or financial conditions.

C: Obligations for which there is an inadequate capacity to ensure timely repayment.

D: Obligations which have a high risk of default or which are currently in default.

1. PACRA's ratings are an assessment of the credit standing of entities in Pakistan. They do not take into account the potential transfer / convertibility risk that may exist for foreign currency creditors. 2. A plus (+) or minus (-) may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to the ‘AAA’ long-term rating category, to categories ‘CCC’ and below, or to short-term ratings. 3. PACRA's rating is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security’s market price or suitability for a particular investor.