Circular debt: Banks agree to convert Rs 400 bn advances into bonds
Karachi: The government has finally been successful in yielding a win-win situation with the banks on account of resolving the circular debt of the power sector as the banks agreed to convert their sovereign notes into Pakistan Investment Bonds (PIBs) and Market treasury bills (T-Bills) of worth PkR 400bn, offered at high yields.
According to Alfalah Securities, the deal has allowed banks to lock up their positions at high interest rates in PIBs and T-bills for a period of five years, keeping in view the interest rate scenario which is expected to fall in the upcoming announcement of the monetary policy. Banks would also be able to extend their credit limits to the power sector, according to the deal finalized with the government.
Meanwhile, the Independent Power Plants (IPPs) would be able to ease up their liquidity position as they would not be subjected to any debt servicing for up to 5 years. The power sector currently owes PkR 300-310 bn to banks including accruals and commodity financing of worth PkR 16 bn and PkR 78 bn respectively. The Ministry of Finance (MoF) has scheduled the amount of debt into two portions of PkR 200 bn each out of which the first portion would be converted into PIBs at a rate of 13.3% which is the average of previous two auctions. Whereas, the second portion of debt would be converted into one year T-bills at a rate of PkR 12.7%. Alfalah Securities expects the issuance of PIBs and T-bills against the credit led by banks to the power sector would help the IPPs to ease off their constrained cash flows while the banks would reap the benefits of higher yields on PIBs and T-bills on the upcoming interest rate expectation.