Pakistan Credit Rating Agency revises Ratings of Engro Fertilizers Limited

Lahore, August 31, 2012 (PPI-OT): The Pakistan Credit Rating Agency (PACRA) has revised the long term entity rating of Engro Fertilizers Limited to “A-” (Single A minus) [previous: “A+”] and the short-term rating to “A2″ (A Two) [previous: “A1”].

The ratings of the two secured and listed TFCs of PKR 4,000mln and PKR 2,000mln, and two privately placed TFCs of PKR 4,000mln and PKR 2,000mln are revised to “A” (Single A) [Previous: AA-]. The rating of privately placed Sukuk, due in Sep-12, stays at AA (Double A).

The ratings capture the stress on business dynamics of EFL that has also eclipsed in the financial profile of the company as well. This primarily emanates from continuous short supply of vital raw material (natural gas) to EFL’s new urea plant (~57% of the total capacity), a phenomenon common to all urea plants connected to SNGPL’s network. As against earlier expectation of status quo, the situation has exacerbated since the beginning of 2012; EFL’s Enven has operated slightly above one month in the last eight months. Any significant improvement appears unlikely over the near term. Meanwhile, the availability of imported urea at subsidized rates by the government has restricted the pricing power earlier enjoyed by EFL.

This has also led to untimely inventory pile-ups. The consequent restrained cashflow generation stressed the company’s financial profile, already stretched due to repayment of expansion related borrowings.

EFL is aggressively working to seek alternative gas sources, mainly direct allocation of dedicated though small gas fields. To create fiscal space, the company has initiated re-profiling of its debt, mainly bilateral and syndicated arrangements excluding the public instruments which will be serviced as per existing schedule.

Final terms are in the process of negotiation with the lenders pursuant to which related documentation will be finalized shortly. This, while giving a grace period of 2.5 years for the upcoming principal repayments, is expected to align debt schedule with EFL’s likely cashflows. Meanwhile, the additional cash through re-profiling along with equity injection (possibly through IPO) would enable the company to incur the capex required for arranging alternative gas fields. While this would be a long term solution, of which the execution timeline is yet to be seen, the short term measures include a continuous dialogue with the government to achieve equitable gas supply. PACRA would continue to monitor related developments to gauge sustained appropriateness of the assigned ratings.

For more information, contact:
Hammad Rashid
Analyst
The Pakistan Credit Rating Agency Limited (PACRA)
Awami Complex, FB1, Usman Block New Garden Town,
Lahore – Pakistan
Tel: +9242 586 9504 -6
Fax: +9242 583 0425
Email: hammad.rashid@pacra.com
Web: www.pacra.com

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