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19 Jun | Thursday
RAM assigns AA1 rating to Sepangar Bay Power’s sukuk

RAM Ratings has assigned a AA1/stable rating to Sepangar Bay Power Corporation Sdn Bhd’s (Sepangar or the Company) up to RM575 million nominal value Sukuk Murabahah (Sukuk). Sepangar is an independent power producer (IPP) that owns and operates a 100-MW combined-cycle, gas-turbine (CCGT) power plant (the Plant) in Kota Kinabalu, Sabah. Under a Power Purchase Agreement (PPA) with Sabah Electricity Sdn Bhd (SESB), Sepangar sells generating capacity and electricity to SESB for 21 years. The proceeds from the Sukuk will mainly be utilised to refinance Sepangar’s outstanding syndicated facility, distribute dividends, pre-fund its liquidity reserve account and repay shareholders’ advances.

The assigned rating reflects the favourable terms of Sepangar’s PPA, its commendable operating track record and robust debt-servicing capability. Under the terms of the PPA, Sepangar is insulated from demand risk as it stands to earn full capacity payments as long as it meets the availability requirements, regardless of the amount of electricity generated. Furthermore, the Company is entitled to energy payments for the actual quantum of electricity generated and delivered, which cover its actual fuel costs and variable operating expenses related to electricity generation, so long as it operates within its heat-rate requirements.

Since its commissioning, Sepangar has been consistently surpassing the minimum operating requirements and operating within its PPA heat-rate requirements. This reflects the competency and capability of the Plant’s operator ― Support Symphony Sdn Bhd ― in managing the Plant. In January 2014, however, the Plant experienced its first technical glitch due to some damage to the steam turbine (ST). While investigations have yet to be completed, RAM notes that the ST has been repaired and back to full operation since 6 June 2014. The repair costs and revenue loss from this incident are expected to be covered by insurance. Our cashflow assessment has factored in the Plant’s poorer performance due to this incident and also the potential technical glitches moving forward.

In the last 3 years, Sepangar’s pre-financing cashflow has been kept above RM60 million, in line with the Plant’s robust operational performance. Based on RAM’s sensitised cashflow projections, Sepangar is envisaged to generate an average annual pre-financing cashflow of about RM51 million throughout the tenure of the Sukuk. This translates into a robust finance service coverage ratio (FSCR) of at least 1.80 times (with cash balances, post-distribution and calculated on principal repayment dates), which commensurates with the AA1 rating. When assessing the Company’s debt-protection metrics in relation to its ongoing annual distributions to shareholders, we have assumed that Sepangar will adhere to its financial covenants throughout the tenure of the Sukuk (i.e. on a forward-looking basis, as opposed to only the year of assessment). The main financial covenants for distributions include meeting a dividend-payment covenant of 1.80 times and no adverse rating impact following such payments.

Meanwhile, the Plant sits on a parcel of land leased from SESB; a separate land title for sub-division has yet to be issued. We are of the view that interruption risk arising from land issues is remote given the importance of Sepangar’s electricity output to the Sabah grid and the persistent shortage of electricity in Sabah. Furthermore, the transaction’s security package does not include the assignment over the lease agreement between SESB and Sepangar. Regardless, the Sukuk holders’ recourse/recovery upon an event of default will remain unchanged, i.e. through the debenture. Besides, Sepangar has covenanted, via the transaction documents, to not amend the lease without the prior consent of the Trustee. As with all power-plant operators, Sepangar is also exposed to inherent regulatory and single-project risks.

Media contact:
Lim Chern Yit
(603) 7628 1035
chernyit@ram.com.my

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