Mughal Iron and Steel’s Sukuk 2 Receives High Preliminary Rating from VIS

Karachi: VIS Credit Rating Company Limited (VIS) has assigned a preliminary rating of ‘AA- (plim)’ to the proposed Sukuk 2 issuance by Mughal Iron and Steel Industries Limited. The rating, indicating high credit quality, comes with a stable outlook, ensuring strong protection factors and modest risk variation due to economic conditions.

According to a statement by VIS Credit Rating Company Limited, the company plans to issue a medium-term, secured, and privately placed Sukuk worth up to PKR 2,500 million, with a PKR 1,000 million green shoe option. The Sukuk has a tenor of up to 15 months, with a bullet principal repayment at maturity, and profits will accrue quarterly, starting three months post-issuance.

The proposed Sukuk is secured by a joint pari passu charge on Mughal Iron and Steel’s current and future assets. Credit enhancements include maintaining a Debt Payment Account and a Debt Service Reserve Account, which holds PKR 165 million with a minimum bank rating of ‘AA-‘.

The rating takes into account the steel bar industry’s high business risk in Pakistan, marked by demand fluctuations, reliance on imports, and energy-intensive operations. Demand is closely linked to construction activities, which have seen limited growth.

Financially, Mughal Iron and Steel showed revenue growth in FY24 due to higher volumes and prices in both ferrous and non-ferrous segments, though margins were pressured by inflation and energy costs. The company benefits from a diverse product portfolio, including copper ingot exports.

Despite adequate liquidity metrics, increased debt reliance for working capital and capital expenditures affected capitalization in FY24 and 1QFY25. However, management expects improvements through a Rs. 1.5 billion equity injection and declining interest rates, foreseeing operational cash flow growth and cost savings from captive power generation.

The rating’s future stability will depend on Mughal Iron and Steel’s ability to execute its plans, maintain its business risk profile, and improve coverage metrics amidst market challenges.