Credit Review of a Textile Exporter's Amortising Corporate Bond

Current net debt is PKR 18.0bn minus cash of PKR 1.2bn = PKR 16.8bn. Net debt/EBITDA is 16.8/5.0 = 3.36x, so the issuer has headroom of 4.25 - 3.36 = 0.89x, equivalent to about PKR 4.45bn of additional net debt at current EBITDA. The planned capex is PKR 4.0bn, 60% debt-funded, so new debt is PKR 2.4bn. Assuming no cash build and no EBITDA uplift in the first year, net debt becomes PKR 19.2bn and leverage is 19.2/5.0 = 3.84x, leaving headroom of only 0.41x, or about PKR 2.05bn. A 10% fall in EBITDA to PKR 4.5bn would lift leverage to 19.2/4.5 = 4.27x, breaching the 4.25x covenant. Interest coverage is currently EBITDA/finance cost = 5.0/2.1 = 2.38x. The new debt at KIBOR+375 bp, or 18.75%, adds about PKR 0.45bn of interest, so finance cost becomes about PKR 2.55bn and coverage falls to 1.96x. If EBITDA falls 10%, coverage is 4.5/2.55 = 1.76x. The 20% amortisation from year 3 adds a cash repayment obligation of 20% of the bond principal each year, which competes with capex and working capital. The covenant headroom is therefore thin, and the structure is vulnerable to a margin squeeze, a rupee appreciation or a downturn in export demand.

The bond's coupon is KIBOR 15.0% + 3.75% = 18.75%. Assuming a 10% withholding tax for a filer, the after-tax yield is about 16.88%. The 3-year PIB at 14.3% gives about 12.87% after the same tax, and the 6-month T-bill at 15.1% gives about 13.59%. The bond therefore offers a spread of about 4.0 percentage points over the PIB and 3.3 points over the T-bill. That spread must compensate for credit loss, illiquidity and concentration. If the annual probability of default is 2% and loss given default is 60%, expected loss is 1.2% a year, leaving about 2.8 points of net spread over the PIB. That looks adequate for an A- bank-facility credit, but the bond is unrated, secured only by a second charge, and has limited secondary liquidity; a 1–2 point illiquidity premium is reasonable. The concentration limits are decisive. Textile exposure is already 11% against a 15% sector limit, so only 4% of fund assets can be added. If the fund has PKR 30bn in assets, 4% is PKR 1.2bn, below the proposed PKR 1.5bn. The single-issuer limit of 10% is not breached at PKR 1.5bn if assets exceed PKR 15bn, but the sector limit is. The investment should therefore be reduced to no more than PKR 1.0–1.2bn, or the sector limit should be renegotiated with the risk committee before purchase.

The bond is not a clear buy at PKR 1.5bn on the current terms. The credit is operationally sound but the planned debt-funded capex leaves leverage at 3.84x and coverage below 2.0x, with covenant breach likely on a 10% EBITDA decline. The second-charge security offers weak recovery, and the unrated status limits the fund's ability to rely on an external credit assessment. Recommendation: invest no more than PKR 1.0–1.2bn, subject to conditions. First, require the issuer to fund at least 50% of the capex from equity or internally generated cash, or obtain a standby equity commitment, so that pro forma leverage stays below 3.60x. Second, tighten the covenant to 4.00x with a 50 bp step-down after year 2, and add a minimum interest coverage covenant of 2.0x. Third, require assignment of export receivables or a first charge over unencumbered assets as additional security. Fourth, obtain a rating or a independent credit review before settlement. Fifth, set monitoring triggers: a quarterly leverage above 3.75x, coverage below 2.0x, or a 15% fall in export orders should prompt a credit committee review and a suspension of further purchases. If the issuer will not accept these terms, the fund should decline and instead buy the 3-year PIB or a shorter T-bill ladder, accepting a lower yield for better liquidity and no credit risk. The sector limit breach must be resolved before any investment, not after.