Updated on Oct 25, 1999
Market Update
On closing basis, the KSE 100 remained range bound, market movement
being restricted between the levels of 1120 and 1180. Subsequently the market closed up by
22.04 points at 1151.21.
After the recent spate of tumultuous events of the past fortnight, the
KSE 100 has finally entered the consolidation phase after being witness to some quite
volatile movements.
Two developments during the week were of primary investor interest:
1. The sudden indefinite delay in PTCLs Board Meeting
2. International Court of Arbitration seeks Hubco presence on hearing
dates
It seems that the sudden delay in PTCLs Board meeting resulted
primarily due to the absence of a clear signal from the concerned ministry, as there seems
to be a power vacuum after the change in government. This apprehension may have compelled
the senior management to seek clarifications from the relevant ministry prior to actually
holding the meeting.
The KSE 100 is likely to remain in the consolidation phase for the next
week with market sentiments continuing to influence sideways movement. For the coming
week, the KSE 100 is likely to witness initial support around the 1140 levels while major
support is likely to appear around the 1120 levels. Initial resistance is likely to felt
around the 1180 levels while major resistance will be met at the 1200 levels.
Sector Review
The State Bank announced new rules for bank financing against shares
yesterday/Power Sector Update
The State Bank announced new rules
In a major move aimed at reducing the level of speculation in the stock
market, the State Bank announced sweeping changes to prudential regulations addressing the
issue of financing against shares. The salient features of the amended regulations are as
follows:
•The minimum margin requirement for lending against shares has
been raised to 50% from 20%, with security valuation now equal to average market value for
the preceding 12 months
•Banks may no longer lend against shares of non-listed companies,
and companies not registered with the Central Depository Company
•Banks have been prohibited from lending against sponsor/director
shares of banks
•Maximum lending to any single party against pledge of shares of a
bank cannot exceed 5% of the paid up capital of the bank, according to the new rules
•Financing to a company against the pledge of its own shares has
been disallowed with immediate effect
•The new regulations become effective immediately.
Starting with the most significant change—addressing the margin
requirement for lending against shares—the Central Bank has dealt a deadly one-two
combination to imprudent lending. First, the theoretical maximum loanable amount against
shares has been reduced by 37.5%, from 80% of collateral to 50% of collateral. Second, the
Central Bank has now introduced a uniform method of valuing shares as security, i.e., the
average market value over the preceding 12 months. Our understanding is that various
methods were used to calculate security value, including the previous year's closing
price. With the new rule in place, banks will probably either be looking for additional
security from borrowers, or calling in loans to comply with the new regulations. Some
panic selling today cannot be ruled out solely in response to this particular amendment,
in our opinion.
Next, by disallowing lending against companies not listed on the stock
exchange, or not registered with the CDC deals a deathblow to the ongoing dispute between
textile companies and the CDC, in our view. Banks have high exposures to textile company
shares via loan collateral. With a host of these companies outside of the CDC system, the
next few weeks should prove to be interesting for both borrowers and lenders. The decision
to stop all lending against shares of companies not listed on the stock exchange is also a
welcome move, which should serve the twin purposes of encouraging new corporate listings
and discouraging "shady" inter-group borrowing by companies against shares of
unlisted sister concerns. In summary, we view the above measures as extremely positive
— both from a banking perspective as well as from a capital market viewpoint. We
believe any weakness (which may materialize) as a result of these steps should be
temporary, and investors should avoid selling out at distress levels. While we continue to
advise investors to stay on the sidelines, the current move by the State Bank is positive
for capital markets.
Power Sector Update
Supreme Court Defers action on Hub Co Appeal:
Hub Co suffered a minor reversal when the Supreme Court referred its
appeal back to the Chief Justice for being heard by a new bench of the court. The appeal
was made against a restraining order preventing the company from proceeding with
international arbitration and preventing the company from encashing the sovereign
guarantee of the Government of Pakistan. The reason behind the request for a new bench is
the absence of one of the judges, who is on leave. The Chief justice is now expected to
constitute a new bench for hearing the case. We maintain that the government is likely to
use all delaying tactics to prolong the legal battle in domestic courts. All delays in
reaching a final settlement continue to eat into the final IRR that is likely to be
available to investors.
Tenaga Says Pakistan Plant Likely To Start Production in January
2000
Tenaga has said its power project, Liberty Power, is set to commence
commercial production in January next year. The project was initially expected to start
production sometime in 1997, but has been delayed due to disputes with the government.
Cost over runs due to delay in project implementation at one time threatened to make the
project a non-starter, but Tenaga's announcement indicates there has been some progress in
resolving disputes with the government. The company expects to finalize the PPA soon, and
is also looking forward to a gas supply agreement to follow shortly. If such an agreement
has indeed been reached, it marks a big step forward for all IPPs. We strongly believe
that Liberty Power is one of the more likely candidates to survive and actually start
production — primarily on the back of the advanced stages of project implementation.
It is still too early to speculate on the final shape of the agreement with the
government, however a revised IRR and Capacity payment is likely. Liberty Power is one of
the larger IPPs, with 235 MW generation capacity.
