KARACHI: China Power Hub Generation Company (CPHGC) on Wednesday served an encashment notice to Hub Power Company (HUBCO) under standby letter of credit (SBLC), which expires today i.e. November 23, 2022.
According to a notice of Pakistan Stock Exchange (PSX), an encashment notice has been served by China Power Hub Generation Company (CPHGC) on November 23, 2022, under the Standby Letter of Credit (SBLC) – which expires today- on the issuing bank.
To recall, the Hub Power Company (HUBC) had provided SBLC for an aggregate amount of $150 million to guarantee an investment in the form of equity or subordinated debt to satisfy the funding shortfall, if any, in CPHGC;
a) To achieve completion of the project to the satisfaction of the lenders; and
b) To repay all principal, interest, fees or any other amounts that may fall due by CPHGC under the finance documents to the finance parties.
Moreover, shares held by Hub Power Holding Limited (HPHL) in CPHGC were pledged in favor of the security trustee in order to secure the company and HPHL’s obligations under the financing documents of CPHGC.
Analysts at Arif Habib Limited said HUBCO will have to provide a new SBLC within ten (10) days from the date of the encashment notice.
In case of non-issuance of new SBLC, banks will disburse $150 million to CPHGC, as per the agreement. In this case, a liability (we are assuming subordinated debt) of the same amount will be booked on the books of HUBCO against a receivable from CPHGC.
We believe, CPHGC will repay the SBLC amount to HUBCO after the project completion date (PCD). To recall, CPHGC has not achieved PCD yet.
In order to calculate the financial impact of the mark-up differential between the amount paid by HUBC to the banks and the amount charged from CPHGC along with the share of profit from associate, we have run a sensitivity assuming different spreads on mark-up charged from CPHGC by HUBC, as illustrated in the Exhibit below.
Our base case scenario assumes zero spread as a company cannot charge a markup lower than its own cost from its associate on a subordinated loan, as per regulations, the analysts said.