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27 Jul | Thursday
RAM Ratings: Malaysia’s first Green Sukuk to be issued by Tadau rated AA3
RAM Ratings has assigned a rating of AA3/Stable to Tadau Energy Sdn Bhd’s (Tadau or the Company) Proposed Islamic Medium-Term Notes Programme of up to RM250 million in nominal value, the first rated sustainable and responsible investment (SRI) sukuk, which is also certified as a Green Sukuk, to be issued by a solar power player in Malaysia. Tadau’s Green Sukuk Framework has been certified by the Centre for International Climate and Environmental Research – Oslo (CICERO). Tadau has two 21-year Power Purchase Agreements (PPAs – PPA1 and PPA2) with Sabah Electricity Sdn Bhd (SESB) to design, construct, own, operate and maintain solar photovoltaic (PV) plants with a total capacity of 50 MWac (the Plants), in Kudat, Sabah. The scheduled commercial operations dates (SCODs) under PPA1 and PPA2, respectively, are 30 June 2017 and 31 March 2018.
 
The rating reflects Tadau’s sturdy project fundamentals, underscored by its long-term PPAs, which require SESB to accept and purchase all energy generated by the Plants, up to a specified limit. “This priority of despatch enjoyed by the Company moderates the absence of fixed availability-based revenue typically earned by thermal power plants,” highlights Chong Van Nee, RAM’s Co-Head of Infrastructure & Utilities Ratings. In addition, the operational complexity of solar PV plants such as Tadau’s is lower than that of thermal power plants due to the absence of moving parts and a combustion function.
 
Tadau also faces a lower degree of construction risk compared to thermal plant operators as solar plants are easier to install in view of their modular structure, a basic operating system as well as a shorter completion timeframe, although the Company is still exposed to topographical challenges. Construction-related risks have, in our view, been largely alleviated by the large contingency sum (12% of construction cost) set aside by Tadau, an additional 3-month timing contingency that has been imputed to our cashflow sensitivities, as well as the fixed-priced, lump-sum turnkey engineering, procurement, construction and commissioning (EPC) contract with SPIC Energy Malaysia Sdn Bhd (SEM), whose contractual obligations are guaranteed by its parent, CPI Power Engineering Corporation Ltd (CPIPEC). The CPIPEC group’s track record of constructing and commissioning solar plants in China is viewed as adequate, although it has limited experience overseas. Construction works for Unit 1, a 2-MW plant under PPA1, has been completed and the unit is currently undergoing the requisite tests prior to COD pursuant to the PPA1. Even so, Tadau’s debt-servicing ability remains strong as we have imputed a 3-month timing contingency in our sensitised cashflow analysis.
 
We also derive some comfort from the reputable manufacturers engaged by Tadau to supply key plant components, such as JA Solar Holdings Co Ltd for mono-crystalline silicon PV modules and Huawei Technologies Co Ltd for string inverters. The rating is, however, moderated by the variability of solar irradiance and the performance ratio of the Plants, which determines the amount of electricity generated. Solar irradiance is based on satellite data from SolarGIS while Tadau’s energy generation is forecasted using PVSyst software – both of which are widely used internationally. Tadau is further exposed to the risk of a reduction in energy rates should there be savings in construction and financing costs. Although it is unclear how such reduction will be computed under the PPAs, the risk is moderated by the transaction structure, under which half of the cost savings (i.e., from any unutilised contingency sum in the Disbursement Account) would be deposited in a Cost Savings Reserve Account and excluded from the distribution covenant to ensure cash retention throughout the transaction’s tenure.
 
Based on RAM’s sensitised cashflow analysis, Tadau’s debt-protection metrics are envisaged to be strong, with respective minimum and average finance service coverage ratios (FSCRs, with cash balances, post-distribution and calculated on payment dates) of 1.50 times and 1.87 times throughout the transaction’s tenure. Under a P90 scenario, we have further assumed lower energy generation due to increased unforeseen outages and reduced efficiency, as well as a lower energy rate. We expect Tadau to adhere to its distribution covenants in registering a Distribution FSCR of at least 1.50 times on a forward-looking basis throughout the transaction’s tenure, as opposed to only in the year of assessment. Notably, there are 7 years in which Tadau’s FSCR (without cash balances) will fall below 1 time, indicating some reliance on brought-forward cash. 
source: RAM Rating Services Berhad
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