Pakistan Credit Rating Agency Revises Stability Rating of Income Opportunity Fund

Lahore, June 28, 2012 (PPI-OT): The Pakistan Credit Rating Agency (PACRA) has revised the fund stability rating of NAFA Income Opportunity Fund (NIOF) to “BBB+ (f)” (Triple B Plus ; Fund Rating) [Previous Rating:”A(f)”], an open-end income fund. The fund’s rating denotes an adequate capacity to manage relative stability in returns and high exposure to risks.

The fund primarily aims to invest in money market and debt securities having good credit quality, while targeting to provide a reasonable rate of return and maximum possible capital preservation to its unit holders. The rating reflects deterioration in fund’s credit quality emanating from significant non-performing instruments representing 18% of the net assets at end-Mar12.

It also incorporates relatively low liquidity profile due to very high allocation towards TFCs (88%) during the same period. The remaining portion comprised daily cash balances with scheduled banks. The deterioration in the credit quality may lead to further downward pressure on returns and relative stability, particularly if restructuring efforts do not materialize in a timely manner. Furthermore, the unit holding concentration has increased, on account of constant decline in fund size, with top10 investors holding 95% of the fund’s net assets.

Going forward, the fund aims to reduce its TFCs exposure to 70% of assets and subsequently invest in short-term government securities (25%) and placements (5%) with scheduled banks (rated A and above); however it has yet to materialize its plans.

The main risk factor affecting the stability of returns emanates from volatility in prices of TFCs amidst largely illiquid market for this segment. At the same time, the fund may be highly vulnerable to redemptions considering stressed financial position of the fund coupled with frequent provisioning of the infected assets.

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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