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29 May | Monday
RAM Ratings assigns preliminary AA3/Stable rating to Sabah-based SPR’s proposed sukuk
RAM Ratings has assigned a preliminary rating of AA3/Stable to SPR Energy (M) Sdn Bhd’s (SPR or the Company) proposed Senior Sukuk Ijarah of RM580 million (the Sukuk). SPR is an independent power producer (IPP) that owns and operates a 100-MW combined-cycle, gas turbine power plant (the Plant) in Kimanis, Sabah. SPR has signed a Power Purchase Agreement (PPA) with Sabah Electricity Sdn Bhd for the sale and delivery of electricity to SESB for 21 years. Proceeds from the Sukuk will mainly be utilised to refinance the Company’s outstanding term loan, make a one-off shareholders’ advance, and fund its working capital requirements.
 
The rating reflects the Company’s healthy project fundamentals, underscored by its stable cashflow generation, which is largely supported by Available Capacity Payments (85%) as long as it meets its performance requirements. While the remaining 15% is exposed to demand risk from SESB via Daily Utilisation Payments (DUPs), the Company had thus far been entitled to full DUPs. Furthermore, the Company earned energy payments for actual quantum of electricity generated and delivered, subject to the Company operating within heat rates stipulated in the PPA.
 
SPR has generally operated satisfactorily within the requirements of the PPA since commercial operations, apart from two incidents which had resulted in revenue shortfalls. As with any new power plant, these are viewed as initial teething issues which had been duly rectified and are not expected to recur. Furthermore, the Plant’s operations and maintenance (O&M) has been entrusted to GE Power Systems (M) Sdn Bhd and GE Global Parts & Products GmbH (GE Company), given the larger GE Group’s extensive track record with gas-fired power plants. While GE Company’s undertaking of the Plant’s O&M is viewed favourably, the mechanism of risk transfer to GE Company does not mirror the PPA and any revenue shortfalls may not be fully compensated by liquidated damages. That said, RAM places greater emphasis on the larger GE Group’s execution capability and also the stricter distribution covenants in the transaction which should ultimately help support SPR’s cashflow profile.
 
Meanwhile, the PPA’s requirements in the event of non-performance are more stringent in comparison to that of other IPPs, particularly in respect of immediate penalty for breaching the stipulated unscheduled outage limit. The Company is also exposed to fuel supply risk given that the Plant’s natural gas supply arrangement provides for supply on a firm basis only for a period of 15 years, whereas short-term tenure of its back-up distillate supply exposes the Company to renewal risks. However, we derive comfort from Sabah’s substantial gas reserves and the various options available to SPR to obtain alternative gas supply for the Plant.
 
The Company’s healthy pre-financing cashflow is envisaged to translate into minimum and average finance service coverage ratios (FSCRs) (with cash balances, post-distribution) of a respective 1.50 and 1.76 times throughout the tenure of the Sukuk. While still within the AA3-threshold, SPR has comparatively less liquidity buffer vis-à-vis its similarly rated peers. Nonetheless, stricter distribution covenant via projected FSCR of at least 1.60 times (with cash balances, post-distribution) as well as additional distribution restriction periods are expected to support cash retention within the Company. In relation of any subordinated payments, we have assumed that SPR will adhere to its financial covenants on a forward-looking basis throughout the transaction’s tenure, as opposed to only in the year of assessment. 
source: RAM Rating Services Berhad
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