null RAM Ratings reaffirms AA3 rating of Tanjung Bin Energy’s RM4.5 bil sukuk
RAM Ratings reaffirms AA3 rating of Tanjung Bin Energy’s RM4.5 bil sukuk
24 May 2022 | Tuesday Source: RAM
RAM Ratings has reaffirmed the AA3/Stable rating of Tanjung Bin Energy Sdn Bhd’s (TBE) RM4.5 bil Islamic MTN Programme (2021/2041) (the Sukuk). The reaffirmation is premised on TBE’s strong cashflow generating capability despite operational issues at the Plant, taking into consideration the proposed issuance of RM710 mil under the Sukuk. The rating will remain supported by standby letters of credit (SBLCs) procured by TBE’s sole shareholder, Malakoff Corporation Berhad (Malakoff), to fulfil minimum required balances in the relevant Financial Service Reserve Accounts and Maintenance Reserve Account. TBE is an independent power producer that owns and operates a 1,000 MW ultra-supercritical coal-fired power plant in Tanjung Bin, Johor (the Plant) under a 25-year power purchase agreement (PPA) with Tenaga Nasional Berhad (TNB) which expires in March 2041.
The Plant’s operational performance was recently affected by a major forced outage from 3 November 2021 to 14 February 2022, caused by damaged low pressure turbine blades. This led to a high rolling UOR of 31.5% as at end-March 2022 against the 6% limit required by TBE’s PPA with TNB. As a temporary solution, the damaged blades were cropped during the forced outage. Repair and replacement works will be completed during the 40-day scheduled outage cycle in October 2022. Until then, the Plant will operate with some deration to its capacity (940 MW). Correspondingly, the Plant incurred hefty available capacity payment (ACP) losses of RM84.2 mil in FY Dec 2021 and RM90.1 mil in 3M FY Dec 2022 (FY Dec 2020: RM 45.4 mil).
In March 2021, the Sukuk’s initial issuance proceeds of RM2.97 bil were utilised to fully repay amounts owed by TBE to its 100%-owned subsidiary and turnkey contractor, Tanjung Bin Energy Issuer Berhad (TBEI), in respect of the latter’s RM3.29 bil Sukuk Murabahah. This facility was previously raised by TBEI to fund the construction of the Plant. TBEI’s financial commitments are supported by back-to-back payments from TBE pursuant to the turnkey contract between the entities. TBEI still shoulders outstanding amounts under term loans of RM700 mil and USD400 mil (collectively, the Senior Loan Facilities).
The subsequent issuance of RM710 mil to partly settle the outstanding amounts of the Senior Loan Facilities will smoothen TBE’s repayment profile as two balloon repayments of the Senior Loan Facilities, due in 2024 and 2027, will be satisfied. TBE remains exposed to refinancing risk under the Sukuk. As the repayment profile of TBE’s initial issuance under the Sukuk mirrors that of TBEI’s RM3.29 bil Sukuk Murabahah, a RM650 mil balloon repayment in 2032 will be retained (which remains a significant 22% of Sukuk outstanding).
The Plant’s long-term viability and residual cashflow will provide ample room for a refinancing exercise closer to 2032. Our analysis takes into account the amortised debt repayment profile of the 2032 balloon repayment at stressed refinancing rates. That said, we are also cognisant that access to funding for coal-fired power plants may be challenging in view of climate-related concerns which has seen more institutional investors and financial institutions pivoting away or reducing exposures to carbon-intensive sectors. Should a refinancing exercise fail to materialise for the 2032 balloon repayment, TBE’s liquidity profile is expected to be supported by SBLCs to be procured with recourse to its holding company, Malakoff. The terms of the Sukuk include the curtailment of shareholder distributions and the procurement of SBLCs prior to the balloon repayment, to preserve TBE’s liquidity.
Given the Plant’s volatile performance, our sensitised cashflow analysis has incorporated ACP and fuel losses in certain years, penalties for a potential failure to meet Availability Targets under the PPA in the future, and higher operating and capital expenses to cater for unexpected operational hiccups. Despite these assumptions, TBE’s strong minimum and average annual finance service coverage ratios (with cash balances, post distribution, calculated on each payment date) of 1.50 times and 1.63 times, respectively, are still supportive of the Sukuk’s rating, taking into consideration the proposed RM710 mil additional Sukuk issuance.
Listed on Bursa Malaysia in May 2015, Malakoff has a long-established presence in the power sector, boasting the biggest portfolio of independent power producers (IPPs) in Peninsular Malaysia. As the Plant is Malakoff’s single largest generating unit, we believe it is strongly committed to TBE, as seen in equity injections in the past. Malakoff’s sound business profile and more diversified power business will be a key consideration for financial institutions in the provision and renewal of SBLCs in the future.
As with other IPPs, TBE is exposed to regulatory and single-project risks. The impact of a force majeure or a major operational failure will be amplified in view of the Plant’s single generating unit. The Company maintains a comprehensive array of insurance policies but these may not fully compensate it for financial losses from such an event on a timely basis.
Published on 23 May 2022
Lee Jo Yee
(603) 3385 2583
Chong Van Nee, CFA
(603) 3385 2482