PIACL debt restructuring: Fair value impact to be recognised on PIAHCL portfolio as per IFRS-9: SBP

KARACHI: In order to facilitate banks in executing the PIACL debt restructuring transaction, the State Bank of Pakistan (SBP) has decided that in line with IFRS-9, fair value impact will be recognized on the PIA Holding Company Limited (PIAHCL) portfolio, treating the syndicated finance facility as a fresh and regular loan.

In addition, aimed at minimising the impact of fair valuation losses on solvency, the period for staggering such losses has also been extended from 2 years to 6 years.

As a part of the privatization, earlier this year, the Federal Cabinet approved restructuring of PIACL and under the restructuring program PIACL was split into two separate entities.

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The PIA’s bad debts were transferred to the PIA Holding Company, leaving a clean PIACL to be sold to the potential investors. With 11 members’ board of directors, former Governor SBP Tariq Bajwa is the Chairman of the PIAHCL.

In March, PIAHCL approved the restructuring of the PIACL’s Rs268 billion commercial debt & financing including Islamic facility of Rs 52.6, incorporating it into the public debt. The Syndicate Term Finance Facility was signed between PIACL, PIAHCL and participating banks.

Under the execution of the PIACL debt & financing restructuring transaction, banks were allowed by the SBP to treat the syndicated finance facility to PIAHCL as a fresh and regular loan with effect from January 01, 2024, subject to compliance with the relevant provisions of Prudential Regulations for corporate and commercial banking.

However, participating banks were seeking some more clarification on the Expected Credit Loss (ECL) under International Financial Reporting Standards-9 (IFRS-9).

“As the syndicated finance facility to PIAHCL will be treated as a fresh and regular loan, the SBP agrees with banks’ understanding that the fair value impact will be recognized on the PIAHCL portfolio according to IFRS-9,” SBP said in a letter.

The SBP has also advised banks that the PIACL portfolio to be transferred to the PIAHCL, under the proposed debt & financing restructuring, will be fair valued from the date it is accounted for in the books of the PIAHCL.

Previously, the SBP allowed the banks to stagger losses under the debt & financing restructuring for a maximum period of two (2) years, with recognition of at least 50 percent of the losses through profit and loss during the first year, and remaining losses in the second year.

However, as per SBP’s fresh directives, in order to facilitate banks in minimizing the impact of fair valuation losses on solvency, the period for staggering such losses has also been extended from 2 years to 6 years, provided that the loss shall be recognized through profit and loss account @ 5 percent, 10 percent, 15 percent, 20 percent, 25 percent and 25 percent from year 1 to year 6, respectively.

The SBP has allowed banks that they may, at their own discretion; consider recognizing the losses earlier than the permissible period of 6 years.

The SBP has also reiterated that banks may use the benchmark rate corresponding to the tenor of the facility, such as 10-year PKRV rate with appropriate credit risk adjustment (margin over the benchmark), if necessary.

According to the SBP, the concerned banks may approach, separately, for necessary clarification regarding the applicability of Expected Credit Loss (ECL) under IFRS-9 on the Government Guaranteed Foreign Currency exposure of PIACL that will be transferred to PIAHCL under the proposed debt restructuring.

The SBP has already clarified that all the lending banks of PIAHCL will be responsible to assess the risks associated while facilitating the transactions and financing.

Banks are expected to employ appropriate safeguards to mitigate the associated risks and to protect their own interests, in accordance with relevant laws, rules, regulations, and bank’s own internal policies, and procedures. As the financing facility to PIAHCL will be considered a fresh and regular loan, the waiver from compliance of PR-8 requested by banks is not required.

Industry sources said banks are agree to extend their debt for 10 years and reduce interest rates from the existing approximately 23.5 percent to a maximum of 12 percent.

Copyright Business Recorder, 2024