RAM reaffirms stable ratings of SPG, Mukah Power’s sukuk

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The enhanced rating reflects support for SPG and Mukah Power from the larger Sarawak Energy Group that the companies belong to.

The enhanced rating reflects support for SPG and Mukah Power from the larger Sarawak Energy Group that the companies belong to.

KUCHING: RAM Ratings Services Bhd has reaffirmed the AA2(s)/Stable rating of Sarawak Power Generation Sdn Bhd’s (SPG) RM215 million Serial Sukuk Musharakah (2006/2021) (Sukuk).

The enhanced rating reflects support for SPG from the larger Sarawak Energy Bhd (SEB) Group that the company belongs to.

“Support from SEB was evinced by the partial early redemption of RM95 million of the sukuk in fiscal 2013,” RAM said in a statement yesterday. “Additionally, SEB contributed RM360 million of advances to SPG to fund the conversion of the latter’s power plant (the Plant) from Open Cycle Gas Turbine to Combined Cycle Gas Turbine (CCGT) mode in fiscal 2010.

“Meanwhile, Syarikat SESCO Berhad (Sesco) had extended a letter of support to SPG, dated September 24, 2007, in which it undertakes to ensure that the Company fully and promptly meets all its financial obligations in respect of the Sukuk throughout the tenure of the facility.”

RMA said the stand-alone issue rating of the sukuk remains supported by SPG’s healthy cash-generating ability. Despite operational challenges at Unit 8 of the Plant, SPG’s debt-servicing ability is expected to be robust, as indicated by its projected annual Sukuk Service Coverage Ratio of at least 2.40 times throughout the remaining tenure of the Sukuk.

“Nevertheless, the existing formula for distribution is not particularly prohibitive, allowing SPG to make substantial distributions to its shareholders should it choose to do so.

“Should SPG make distributions on a forward-looking basis, our sensitised cashflow projections show that its minimum SSCR (with cash balances, post-distribution, calculated over a 12-month period on semi-annual principal repayment dates) would reach 1.50 times throughout the Sukuk’s remaining tenure.”

Meanwhile, RAM in a separate statement also reffirmed the enhanced rating of Mukah Power Generation Sdn Bhd’s RM665 million Senior Sukuk Mudharabah Programme (2006/2021) at AA2(s)/Stable.

“Support from Sarawak Energy is evinced by an equity injection of RM268 million into Mukah Power in September 2013, to facilitate the early redemption of the Company’s Junior Sukuk.

In March 2014, Mukah Power and Sesco signed a Supplementary Power Purchase Agreement (PPA) to boost the Company’s financial position retrospectively from 2013, via an increase in tariffs for capacity payments (CP) in 2013 and 2014 and for energy payments (EP) throughout the tenure of the PPA.

In addition, Sesco had extended a Letter of Support, dated 21 August 2013, to Mukah Power, ensuring that the Company will meet its financial obligations under the Senior Sukuk throughout the tenure of the facility.

“The stand-alone credit profile of the Senior Sukuk remains supported by minimal demand risk,” RAM added. “The Company is entitled to full CPs, irrespective of the quantum of electricity generated, subject to meeting certain performance requirements.

“It is also entitled to EPs for electricity sold, with an annual despatch commitment from SESCO in respect of at least 1,400GWh.”

Meanwhile, Mukah Power’s debt-servicing ability is expected to be strained over the remaining tenure of the Senior Sukuk. Since inception, RAM observed that Mukah Power’s coal-consumption rate has gradually risen due to the usage of inferior-quality coal, while its operational expenses continue to be exposed to cost fluctuations due to the absence of an operations and maintenance agreement.

“Considering this, we foresee Mukah Power’s Senior Sukuk coverage levels declining to a minimum of 1.08 times over the remaining tenure should the Group not extend financial support to meet the Sukuk Payment Account Balance by end-December 2016.

“As per the Company’s representation, we assume that there will be no distributions or subordinated payments to Sarawak Energy. Elsewhere, the Company remains exposed to single-project risk as it derives its income from a specific project.”