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The Pakistan Credit Rating Agency Limited

Date
19-Oct-2017
Analysts
Rai Umar Zafar
rai.umar@pacra.com

Ahmed Sheikh
ahmed.sheikh@pacra.com

+92-42-35869504
www.pacra.com
Applicable Criteria

  • Debt Instruments Rating Methodology (Jun 17)
  • Preference Shares Rating Methodology (Jun 17)
  • Correlation between long-term and short-term rating scale (Jun 17)
  • Criteria Modifiers (Jun 17)
  • Methodology | Holding Companies (Jun 17)
  • , ()

Related Research

  • Sector Study | Holding Company (Jun 17)
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PACRA Assigns Preliminary Rating to Sukuk of Dawood Hercules Corporation Limited; Maintains Entity Ratings
 Rating Type Entity Debt Instrument
Current
(19-Oct-2017)
Previous
(12-Jan-2017)
Current
(19-Oct-2017)
 Action Maintain Maintain Preliminary
 Long Term AA- AA- AA
 Short Term A1+ A1+
 -
 Outlook Stable Stable Stable
 Rating Watch - - -

The ratings signify Dawood Hercules Corporation Limited's (DH Corp) strong group structure and a well-diversified presence in various industries through associates and subsidiaries. The oversight of investments is done through a structured process, an important pillar of which is the analytical team. The company is currently transforming its investment portfolio. The transformation process includes divestment in energy sector (Hub Power Company Limited) and utilizing the proceeds to penetrate telecommunication sector by acquiring 45% equity stake in edotco Pakistan (Pvt.) Limited. DH Corp's financial profile continues to benefit from the ensuing dividend stream of the underlying portfolio – core & strategic Investments. However, post divestment, dividend income is expected to slightly decline until the new investment starts to distribute income. The rating draws comfort from company’s low leverage and good debt coverages. The company plans to issue a Sukuk to re-profile its current debt structure – short and long term debt – which will benefit the financial risk profile. The Sukuk has a low risk profile as it is secured through a charge on the shares of the company core investment inclusive of 50% margin. The business acumen of the sponsoring family and strong governance practices provide support to the ratings.

The ratings are dependent upon the group's overall risk profile. The targeted growth may not elicit rise in the risk exposure. At the same time, the management’s policy to distribute its income, while maintaining a strong financial risk would be critical. Timely and successful investment transition also remains important for the ratings.
About the Entity
Dawood Hercules Corporation Limited came into being on January 2011, as a result of spin-off of its fertilizer operations. The holding company primarily manages investments in its subsidiary and associates. The company holds 37.22% ownership in Engro Corporation - a holding company with the business portfolio across various sectors. The company has reclassified its 14.91% holding in HUBCO as investment for sale in current assets.

The company's ten member Board of Directors includes four representatives of Dawood family. The remaining six members are non-executive and independent directors. Mr. Hussain Dawood, the patriarch of Dawood family, serves as the chairman of the board. Mr. Inam-ur-Rahman (Deemed Director) is in-charge of the company as a CEO.

About the Instrument
DH Corp is in process to issue rated, Over the Counter Listed and Secured Islamic Certificates (“Sukuks”) of PKR 6bln (including PKR 1bln green shoe option). The proceeds from the issue will be used to consolidate and re-profile the existing debt of the company into a single instrument. The issue has tenor of five years with fifteen months grace period. Profits will be payable quarterly at the rate of (3M Kibor + 1%). The issue is secured through Pledge of shares of Engro Corporation Limited, inclusive of 50% margin, in a designated CDC account and Floating or Hypothecation charge on all present and future assets of the Company inclusive of a 25% margin.
The primary function of PACRA is to evaluate the capacity and willingness of an entity to honor its obligations. Our ratings reflect an independent, professional and impartial assessment of the risks associated with a particular instrument or an entity. PACRA's comprehensive offerings include instrument and entity credit ratings, insurer financial strength ratings, fund ratings, asset manager ratings and real estate gradings. PACRA opinion 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.