RAM Ratings reaffirms Sepangar’s AA1/Stable sukuk rating

RAM Ratings has reaffirmed the AA1/Stable rating of Sepangar Bay Power Corporation Sdn Bhd’s (Sepangar or the Company) RM575 mil Nominal Value Sukuk Murabahah (the Sukuk). Sepangar owns and operates a 100 MW combined-cycle gas turbine power plant in Kota Kinabalu, Sabah (the Plant). On 28 January 2005, the Company signed a 21-year Power Purchase Agreement (PPA) with Sabah Electricity Sdn Bhd (SESB), spanning from 21 August 2008 to 11 August 2029.

The rating reflects Sepangar’s robust cashflow to service its debt obligations, backed by the favourable terms of its PPA with its sole off-taker, SESB. Despite a challenging year amid the COVID-19 pandemic and the various stages of the Movement Control Order, Sepangar had been largely unaffected as it had been allowed to keep operating given its provision of essential services. 

The Plant’s operating performance deteriorated slightly last year due to a glitch in the steam turbine generator and more frequent half-block shutdowns amid slower demand. Nonetheless, its performance was commendable, with a robust average 12-month rolling equivalent availability factor of 91.66% in 2020 – well above the PPA requirement of 87%. This had enabled Sepangar to continue earning full monthly capacity payments. The Company has also been able to consistently fully pass through its fuel costs to SESB; Sepangar met its PPA requirements in 1Q 2021.

As at the last principal repayment date of the Sukuk, Sepangar’s finance service coverage ratio (FSCR) stood at 2.62 times (with cash balances, post-distribution) – higher than the projected 2.36 times – backed by its stronger-than-expected cashflow. Based on our sensitised case, Sepangar is envisaged to preserve its healthy debt coverage with an average annual pre-financing cashflow of about RM44.31 mil throughout the tenure of the Sukuk. This translates into strong minimum and average FSCRs of a respective 1.80 and 2.09 times (with cash balances, post-distribution and calculated on sukuk principal and profit payment dates).    

Notably, Sepangar’s dividend distributions are subject to stringent covenants, including an FSCR (with cash balances, post-distribution and calculated on sukuk principal and profit payment dates) of at least 1.80 times before any distributions. It must also comply with annual distribution caps while such payouts cannot have any adverse credit impact on the Company. 

We have assumed that Sepangar will adhere to its financial covenants throughout the tenure of the Sukuk (as opposed to only in the year of assessment). As with other independent power producers, the Company is exposed to regulatory and single-project risks.

Published on 11 June 2021

Analytical contact

Irfan Afifah Mohd Zaki

(603) 3385 2551

irfan@ram.com.my

Media contact

Padthma Subbiah

(603) 3385 2577

padthma@ram.com.my

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Published by RAM Rating Services Berhad

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