Saturday, 6 February 2016

MARC confirms AAAIS rating on TNB Western Energy's sukuk

MARC has affirmed the rating of AAAIS on TNB Western Energy’s sukuk of up to RM4 billion with a stable outlook. An AAA rating from MARC denotes an "extremely strong ability to make payment on the instrument issued under the Islamic asset-based financing contract(s)".

TNB Western Energy is the funding vehicle for TNB Manjung Five, to undertake the construction of a 1,000MW ultra-supercritical coal-fired power plant under a 25-year power purchase agreement (PPA) with Tenaga Nasional (TNB). The power plant sits in close proximity to TNB’s four other existing power plants on a 325 hectare reclaimed island in Manjung, Perak, Malaysia.

The rating affirmation continues to reflect the equalisation of TNB Western Energy’s rating with its ultimate parent TNB’s AAA/stable rating based on guarantees and commitments from the national utility company. TNB has provided an unconditional and irrevocable project completion support guarantee for the power plant project as well as a rolling guarantee in favour of the sukuk holders to cover scheduled semi-annual distributions (principal and profit payments) in the event of plant underperformance. MARC’s approach is further underpinned by TNB’s undertaking to maintain full ownership of TNB Western Energy through its wholly-owned subsidiary, TNB Manjung Five, and by the multiple operational linkages between all three entities.

As at October 31, 2015, the project was 68.85% completed with the accrued project cost at RM3.4 billion. Despite a four-month delay in the tunnelling excavation works by the engineering, procurement and construction contractors due to a breakdown of the tunnel boring machine, the overall construction progress was 3.4% ahead of schedule as of end-October 2015. The scheduled commercial operation date (COD) on October 1, 2017 remains unchanged as the EPC contractors are currently expediting works at the affected area, bearing the cost being incurred in connection with the incident. MARC notes that in the event of a failure to achieve scheduled COD, TNB Manjung Five’s liability is adequately covered by provisions for liquidated damages claimable from the EPC contractors. At the same time, sukuk holders are protected against risk of completion delays by TNB’s funding support for scheduled distributions on the sukuk for up to a 12-month period post-scheduled COD.

Upon commissioning, TNB Manjung Five is expected to generate predictable cash flow streams provided by the PPA’s availability-based capacity payments as well as the pass-through of fuel and variable expenses to TNB. The project’s exposure to operations and maintenance (O&M) as well as fuel supply risks are deemed low due to the O&M operator and fuel supplier’s track record, experience and their strong linkages with TNB. Although the bullet repayment of RM1.3 billion due in 2033 will expose TNB Western Energy to significant refinancing risk, MARC draws comfort from the availability of a rolling guarantee from TNB and working capital facilities of up to RM200 million to address any short-term liquidity risks.

Based on the base case analysis, the project is expected to generate sufficient cash flow from operations to meet the scheduled financial obligations, except for the final principal repayment amount of RM1.3 billion due in 2033. This is due to the weak liquidity buffer of the projected cash flow given that the ending cash balances (excluding maintenance reserve account) range only between RM0.03 million and RM0.8 million. The minimum and average semi-annual finance service cover ratios (FSCR) of the base case analysis stood at 1.27 times and 1.32 times respectively. MARC’s sensitivity analysis indicates that the project cash flow will be able to withstand moderate plant performance shortfalls with minimum semi-annual FSCRs (with cash balances) above 1.00 time.

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Find out more about MARC's rating definitions (PDF; from page 53)