PACRA assigns negative outlook to Chanar Energy Limited – Rating Watch

Lahore, June 29, 2020 (PPI-OT): Chanar Energy Limited has a 22MW bagasse-based power plant which is adding renewable energy to the national grid. The IPP model is designed to creating synergy and higher efficiency gains between IPP and sugar mill. Sustainable business profile of Chanar Energy emanates from the demand risk coverage under Energy Purchase Agreement signed with CPPA-G and ‘Bagasse supply and Steam Purchase Agreement’ with Chanar Sugar Mills Limited, a related entity. However, procurement of raw material, solely from the associated concern, Chanar Sugar Mills, is posing constraints on generation capability and cash flow stream of the Company.

The main risk factor affecting the stability of return is the availability of bagasse at a price higher than the assigned fuel component, by NEPRA. The ratings reflect company’s average credit quality and liquidity profile. Plant availability during crushing season is reported at 19%, while during off season the same remained unavailable. Below benchmark operational parameters, coupled with restricted supply avenues, impacted the Company’s revenues and profitability.

Company has project debt of PKR 2,200mln repayable till Feb 2029 in quarterly instalments. Uptill now, the due debt obligations are met through energy receivables and short-term credit lines. Likewise, the operational needs are financed by sponsors. The leverage is high in comparison to the equity base. The downward adjustment in the interest rates would add cushion. The management is resorting to deferment appeal for the upcoming principal payments. However, material progress is yet to be seen, as approval from the financing consortium is in process.

Rating Watch and developing outlook signifies the prevailing uncertainty pertinent to company’s financial muscles, deferment approval and timely debt servicing. The ratings are dependent on Chanar Energy’s ability to sustain its business (Both On and Off sugar season) and financial profile; any deterioration in margins, leading to weak coverages and pressure on liquidity, will have a negative impact on ratings. Financial support from sponsors remains imperative in the long term. However, SBP’s initiative of reducing interest rates and deferral of principal repayments for one year will provide relief.

For more information, contact:
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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