KARACHI: Agha Steel Industries Ltd has decided to exercise the call option on the Rs5 billion Islamic bond that it issued at the end of 2018, the steelmaker said in a regulatory filing on Wednesday.

A call option lets a borrower redeem its bond — or Sukuk in the case of Agha Steel — before its maturity date.

In other words, the bond issuer pays off the debt earlier than planned through the call option.

A company may choose to exercise this option because of either a better liquidity position or its belief that it’ll be able to re-borrow the required funds at a lower interest rate.

“We’re in the process of signing agreements with the investors today,” the company said in the stock filing.

The Rs5bn Sukuk included a Rs1bn green-shoe option, which is the over-allotment provision allowing the borrower to raise additional funds at the same rate if the public demand exceeds expectations.

The debt instrument was privately placed and then listed on the stock exchange in 2019 for a period of six years, including a grace period of two years.

The steel maker issued the Islamic bond to settle its existing long-term debts and finance a portion of the costs associated with the BMR (balancing, modernisation and repla­cement) and commissioning of a new rolling mill unit.

The instrument, which carried a profit of three-month Karachi Interbank Offered Rate (Kibor) plus 80 basis points a year, was redeemable in 16 equal instalments from January 2022 to October 2025.

At the end of December 2022, the latest period for which detailed financial accounts of the company are available, its outstanding borrowing against the Sukuk certificates stood at Rs3.7bn.

In its April report on the debt instrument, VIS Cre­dit Rating Company pla­ced it in the category of “Rating Watch — Deve­loping” on account of the steel maker’s intention to exercise the call option for the full prepayment of the outstanding amount.

The principal instalment due in April 2023 remained outstanding, the rating agency said, adding that it should be a part of the early repayment amount expected to be settled through the call option.

“The company is in the process of arranging funds for early repayment of outstanding Sukuk. VIS will continue to monitor developments in this regard,” it said.

Published in Dawn, July 6th, 2023