KARACHI, May 2: If the decision by Dewan Salman Fibre Limited (DSFL) to issue preference shares goes through, it would be the first preferred stock to make a comeback in the Pakistani equity market, after an absence of more than 40 years.

The DSFL Board had voted in a mid-April meeting to ‘pursue issue of preference shares’ and the proposal would be forwarded to the members at an Extra Ordinary General Meeting to be called ‘within 60 days’.

Currently, of the 741 quoted stocks, there are only three ‘preference’ shares on the Karachi Stock Exchange — issued way back in 1957 and 1961: 7 per cent preference shares of Frontier Sugar Mills; 6 per cent preference shares of Saleem Sugar Mills and participating preference shares also of the same company.

Only a couple of years ago the government re-opened the route for corporates — vide the Finance Bill — to raise capital through the issue of shares of classes other than the ‘ordinary’. The DSFL preference stock issue — the size, dividend rate and timing of which are yet to be determined — may then be the first to make the foray into the equity market. But there are many a slip between the cup and the lip.

Earlier on July 30, 2001, Security Leasing Corporation Limited had sought approval of company shareholders to issue 10 million ‘redeemable convertible cumulative preference’ shares of Rs10 each; the company wanting to raise its minimum paid-up capital to Rs200 million so as to meet the statutory requirement. Nothing has been heard about the issue since.

Preference stocks are what analysts call “hybrid security” having fixed payments like debt. They have ‘preferential’ claim over the ordinary shareholders on dividends and assets. They may not have right to attend or vote at meetings. In relation to banks (creditors), however, preference shareholders hold only secondary claims. Thus banks may take comfort from such issues, if they help to improve cash flow and finances.

Analysts point out that DSFL’s current ratio has been running below the bench mark of 1.0 for the last two years. At end-December last year, current ratio stood at 1.03 and debt-to-equity ratio was 48:52. The company has already raised authorized capital from Rs3.6 to Rs6.3 billion to accommodate the proposed preference issue.

The DSFL Board is understood to have opted for preference stock, as the best available means to raise the much-needed cash. The company requires funds to improve cash flow and to get along with the BMR that envisages manufacture of coloured and hollow fibre as well as expansion of capacity to 350,000 tons per annum. Bank loan was not an option for the balance sheet is already saddled with debts taken earlier to finance the acquisition of Dhan Fibres. The company has to begin repayment of a syndicated term loan next year. Then there are two Term Finance Certificates (TFCs) and several loans for the acrylic business.

DSFL could have raised cash through a right issue but the group itself is the majority stake holder in the company. At the moment, it may not want to put more of its own money in a venture which is not yielding dividends. DSFL has not distributed cash dividend for the last two years, issuing bonus shares instead: at 50 per cent for 2000 and 15.5 per cent for 2001. Another stock bonus could have raised the company’s paid-up capital, but that would not generate cash. All of that leaves the company to tap the option of issuing preferred stock.