MARC has affirmed its AAAIS rating on TNB Northern Energy's Islamic securities (sukuk) of RM1.625 billion with a stable outlook.
TNB Northern Energy was established to finance and develop a 1,071.43-megawatt combined-cycle gas turbine power plant in Seberang Perai Tengah, Penang, under a 21-year power purchase agreement (PPA) with offtaker Tenaga Nasional (TNB). TNB Northern Energy is 100% owned by TNB Prai which is itself a fully-owned TNB subsidiary.
The rating and outlook are equalised with those of TNB Northern Energy’s ultimate parent TNB, on which MARC currently has a senior unsecured rating of AAA/Stable. The rating equalisation is based on TNB’s commitment in the form of an unconditional and irrevocable project completion support guarantee and post-completion rolling guarantee in favour of sukuk holders. MARC’s assessment is further underpinned by TNB’s undertaking to maintain full ownership of TNB Northern Energy in addition to the operational proximity and financial linkages between the two entities.
The power plant project achieved full commercial operation date (COD) on February 20, 2016, following a 50-day delay from the original scheduled COD. The delay, which was attributed to design issues and defects encountered during the commissioning phase, has resulted in liquidated damages (LD) of RM32.1 million payable to TNB. MARC notes that TNB Northern Energy will claim a LD payment of RM59.6 million from the engineering, procurement and construction (EPC) contractor, Samsung C&T KL. The delay, coupled with the weakening ringgit, has led to a 3.9% increase above the original project cost budget to RM2,587.3 million at completion. The increase, however, remains well within the project sponsor’s completion support guarantee of 10% or RM249 million.
The plant’s operations and maintenance (O&M) duties are carried out by related entity TNB Repair & Maintenance (TNB Remaco) under a 21-year O&M agreement. The rating agency notes that the LD provision under the O&M agreement is not sufficient to recover any revenue losses given that TNB Remaco is only liable for up to 30% in capacity payment reductions and non-reimbursable fuel cost in the event of breaches in the contracted average availability target, net output capacity and net heat rate. Nonetheless, O&M risk is mitigated through the availability of plant warranty and long-term turbine maintenance support provided by Samsung and Siemens respectively. With regard to fuel supply risk, the long-term gas supply agreement with Petroliam Nasional addresses this concern.
The project revenue in the form of availability capacity and energy payments subject to meeting performance standards under the PPA provides sufficient coverage to TNB Northern Energy’s fairly flat debt servicing profile. The company is expected to achieve an average finance service cover ratio (FSCR) without cash balances of 1.31 times during the sukuk tenure. MARC views TNB Northern Energy’s finance service ability as adequate even after taking into account the COD delay which has led the projected cash balance being revised downward by RM4 million to RM33 million as at December 31, 2016. TNB Northern Energy’s designated account balances of RM118 million as at April 30, 2016 is well above the finance service obligations of RM70 million for 2016.
MARC’s sensitivity analysis reveals that the project coverage is only able to withstand mild stresses due to the absence of cash build-up. TNB Northern Energy is expected to return about RM834 million of capital to its shareholders during the sukuk tenure subject to meeting a distribution finance service cover ratio of 1.5 times. The rating agency expects the project sponsor’s rolling guarantee to act as a reliable liquidity source during periods of weaker-than-projected cash flows.
The stable outlook mirrors the outlook on TNB's senior unsecured rating. Any changes in TNB Northern Energy's rating and/or outlook would be primarily driven by a revision of TNB's rating and/or outlook.
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View the definitions of MARC's ratings
Read the Suroor Asia blog post about MARC's analysis of TNB Western Energy's sukuk
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Showing posts with label MARC. Show all posts
Showing posts with label MARC. Show all posts
Thursday, 14 July 2016
Thursday, 7 July 2016
MARC confirms rating of AAAIS on Islamic Development Bank's sukuk wakalah
MARC has assigned a final rating of AAAIS to Islamic Development Bank’s (IsDB) proposed sukuk wakalah (sukuk) issuance of up to RM400 million by Tadamun Services (Tadamun), a trust established by IsDB for the purpose of issuing the sukuk. The outlook on the rating is stable.
Upon review of the final documentation of the issuance, MARC is satisfied that the terms and conditions of the sukuk have not changed in any material way from the draft documentation on which the earlier preliminary rating of AAAIS was based.
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Upon review of the final documentation of the issuance, MARC is satisfied that the terms and conditions of the sukuk have not changed in any material way from the draft documentation on which the earlier preliminary rating of AAAIS was based.
Interested?
View the definitions of MARC's ratings
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Sunday, 26 June 2016
MARC withdraws rating on Malaysian Merchant Marine
MARC has withdrawn its rating of DID* on Malaysian Merchant Marine’s (MMM's) RM120 million Al Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS).
The rating withdrawal follows the cancellation of the BaIDS programme on June 10, 2016, as confirmed by the facility agent. In MARC’s last rating action on April 2, 2010, the rating was downgraded to DID following MMM’s failure to meet an accelerated repayment of the BaIDS which became immediately due and payable subsequent to the declaration of an event of default and notice of the same by the trustee and security trustee on March 29, 2010.
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*DID in the MARC scheme refers to failure to make scheduled payment on the instrument issued under the Islamic financing contract(s).
The rating withdrawal follows the cancellation of the BaIDS programme on June 10, 2016, as confirmed by the facility agent. In MARC’s last rating action on April 2, 2010, the rating was downgraded to DID following MMM’s failure to meet an accelerated repayment of the BaIDS which became immediately due and payable subsequent to the declaration of an event of default and notice of the same by the trustee and security trustee on March 29, 2010.
Interested?
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*DID in the MARC scheme refers to failure to make scheduled payment on the instrument issued under the Islamic financing contract(s).
Wednesday, 1 June 2016
MARC assigns AA-IS rating to Lebuhraya DUKE Fasa 3's sukuk wakalah
MARC has assigned a rating of AA-IS to toll concessionaire Lebuhraya DUKE Fasa 3 (DUKE 3) proposed RM3.64 billion sukuk wakalah with a stable outlook. DUKE 3 was incorporated by Ekovest to undertake the design, construction, financing, operations and maintenance of DUKE Phase 3 expressway under a concession agreement with the Malaysian government in January, 2016. The concession is for a period of 53 years and six months.
The 32.1km expressway is to be elevated and link the Middle Ring Road 2 (MRR2) at Wangsa Maju to the Kerinchi Link on the Federal Highway in Kuala Lumpur.
The proceeds from the sukuk will part fund the estimated RM5.05 billion project cost; the remaining funding will come from a RM560 million interest-free government reimbursable interest assistance (RIA) and RM850 million equity. The proposed debt and equity mix of 83:17 for the Duke Phase 3 project is in line with similar MARC-rated project financing structures. The rating on the proposed sukuk wakalah incorporates the adequate cash flow coverage, the strong track record of the project sponsor, Ekovest, and the importance of the expressway in the transportation development plan for Kuala Lumpur.
The rating is weighed down by the moderate likelihood of lower-than-projected traffic growth arising mainly from competitive alternative mode of transportation. In addition, toll pricing and possible future toll hike deferments as well as the potential impact from the incremental financial obligations on the RIA may pose some risks to the project cash flow.
MARC views the construction risk on the DUKE Phase 3 project to be largely mitigated by the track record of project sponsor Ekovest, which had completed the DUKE Phase 1 project and is currently undertaking the DUKE Phase 2 project that is scheduled for completion by end-2016. A fixed sum turnkey engineering, procurement and construction (EPC) contract amounting to RM3.96 billion has been awarded to Ekovest. Given that DUKE Phase 3’s elevated alignment will pass through the densely populated areas of Chan Sow Lin, Pandan Indah and Wangsa Maju, the construction could be challenging relative to Ekovest’s other projects. Nonetheless, the construction period of 42 months is considered reasonable, while comfort is also drawn from the liquidated ascertained damages provisions under the EPC contract and the progressive buildup of 5% of the total construction cost (or RM184.5 million) over the first 18 months of the construction period to mitigate the risk of construction cost overruns. The buildup funds will be progressively carved-out from the EPC’s gross contract billings as security for the sukuk holders during construction phase.
MARC notes that as 96.5% of the 553.3 acres of land needed for the expressway are either on existing road reserves or have been acquired, land acquisition risk is considered low. The balance of the 19.6 acres is privately held, of which 6.9 acres (13 lots) in the Chan Sow Lin area are in the early stages of negotiation while the rest are at fairly advanced stages. The sizeable government funding set aside for the purchase of land parcels in the Chan Sow Lin area and the limited number of parcels involved minimise the risk relating to the land acquisition in this area.
The rating agency views that the traffic flow on DUKE Phase 3, upon its expected completion in 2020, could be affected by the availability of alternative routes and Mass Rapid Transit (MRT) system. This notwithstanding, the elevated expressway’s direct connectivity between the heavily congested MRR2 and Federal Highway as well as to other important major toll roads in the Klang Valley mitigates the risk of underutilisation. Based on the traffic study by Perunding Trafik Klasik,
DUKE Phase 3 is expected to achieve a cumulative average daily traffic of 99,840 vehicles from its four toll plazas when tolling operations begin on January 1, 2020. MARC notes that DUKE Phase 3’s relatively steep traffic growth rates in the first five years are supported by low opening traffic volume and the prevailing heavy congestion along competing routes. Excluding the traffic flow during the ramp-up period (2020-2024), traffic volume is expected to grow by a CAGR of 3.2% p.a.
DUKE 3 is projected to achieve minimum and average predistribution finance service cover ratio (FSCR) with cash balances of 2.13 times and 2.29 times respectively during the sukuk tenure. The rating agency notes that the thin project coverage levels are mainly due to the RIA loan repayment that limits DUKE 3 from building up its liquidity reserves at higher levels. The fixed repayment on the RIA will commence in 2023 together with the amortisation of the sukuk, subject to a distribution FSCR of 2.00 times. Nonetheless, the RIA repayments can be deferred (subject to an interest of 8% per annum) and has lower security ranking compared to the sukuk holders.
MARC’s sensitivity analysis reveals that the project cash flow can withstand moderate stresses arising from construction cost overruns and traffic underperformance. The project cash flow is vulnerable to a breach in the minimum FSCR covenant of 1.50 times in 2022 should the construction cost overrun exceed 10%. DUKE 3’s finance service ability would also come under pressure in the event of a 20% reduction in the overall projected traffic volume. Under these stressed scenarios, DUKE 3 is expected to defer most of its debt obligations on the RIA to protect sukuk holders from a further weakening of the cash flow coverage. Sukuk holders are protected from prolonged construction delay of up to 18 months as the prefunded finance service reserve is sufficient to cover the first three semi-annual profit payments.
The stable outlook incorporates MARC’s expectation that the project sponsor will adhere to the predetermined capital commitment under the financing structure and the construction of DUKE Phase 3 will progress on schedule and within budget.
Interested?
Refer to the MARC Definitive Ratings Guide for rating definitions (PDF, page 54)
The 32.1km expressway is to be elevated and link the Middle Ring Road 2 (MRR2) at Wangsa Maju to the Kerinchi Link on the Federal Highway in Kuala Lumpur.
The proceeds from the sukuk will part fund the estimated RM5.05 billion project cost; the remaining funding will come from a RM560 million interest-free government reimbursable interest assistance (RIA) and RM850 million equity. The proposed debt and equity mix of 83:17 for the Duke Phase 3 project is in line with similar MARC-rated project financing structures. The rating on the proposed sukuk wakalah incorporates the adequate cash flow coverage, the strong track record of the project sponsor, Ekovest, and the importance of the expressway in the transportation development plan for Kuala Lumpur.
The rating is weighed down by the moderate likelihood of lower-than-projected traffic growth arising mainly from competitive alternative mode of transportation. In addition, toll pricing and possible future toll hike deferments as well as the potential impact from the incremental financial obligations on the RIA may pose some risks to the project cash flow.
MARC views the construction risk on the DUKE Phase 3 project to be largely mitigated by the track record of project sponsor Ekovest, which had completed the DUKE Phase 1 project and is currently undertaking the DUKE Phase 2 project that is scheduled for completion by end-2016. A fixed sum turnkey engineering, procurement and construction (EPC) contract amounting to RM3.96 billion has been awarded to Ekovest. Given that DUKE Phase 3’s elevated alignment will pass through the densely populated areas of Chan Sow Lin, Pandan Indah and Wangsa Maju, the construction could be challenging relative to Ekovest’s other projects. Nonetheless, the construction period of 42 months is considered reasonable, while comfort is also drawn from the liquidated ascertained damages provisions under the EPC contract and the progressive buildup of 5% of the total construction cost (or RM184.5 million) over the first 18 months of the construction period to mitigate the risk of construction cost overruns. The buildup funds will be progressively carved-out from the EPC’s gross contract billings as security for the sukuk holders during construction phase.
MARC notes that as 96.5% of the 553.3 acres of land needed for the expressway are either on existing road reserves or have been acquired, land acquisition risk is considered low. The balance of the 19.6 acres is privately held, of which 6.9 acres (13 lots) in the Chan Sow Lin area are in the early stages of negotiation while the rest are at fairly advanced stages. The sizeable government funding set aside for the purchase of land parcels in the Chan Sow Lin area and the limited number of parcels involved minimise the risk relating to the land acquisition in this area.
The rating agency views that the traffic flow on DUKE Phase 3, upon its expected completion in 2020, could be affected by the availability of alternative routes and Mass Rapid Transit (MRT) system. This notwithstanding, the elevated expressway’s direct connectivity between the heavily congested MRR2 and Federal Highway as well as to other important major toll roads in the Klang Valley mitigates the risk of underutilisation. Based on the traffic study by Perunding Trafik Klasik,
DUKE Phase 3 is expected to achieve a cumulative average daily traffic of 99,840 vehicles from its four toll plazas when tolling operations begin on January 1, 2020. MARC notes that DUKE Phase 3’s relatively steep traffic growth rates in the first five years are supported by low opening traffic volume and the prevailing heavy congestion along competing routes. Excluding the traffic flow during the ramp-up period (2020-2024), traffic volume is expected to grow by a CAGR of 3.2% p.a.
DUKE 3 is projected to achieve minimum and average predistribution finance service cover ratio (FSCR) with cash balances of 2.13 times and 2.29 times respectively during the sukuk tenure. The rating agency notes that the thin project coverage levels are mainly due to the RIA loan repayment that limits DUKE 3 from building up its liquidity reserves at higher levels. The fixed repayment on the RIA will commence in 2023 together with the amortisation of the sukuk, subject to a distribution FSCR of 2.00 times. Nonetheless, the RIA repayments can be deferred (subject to an interest of 8% per annum) and has lower security ranking compared to the sukuk holders.
MARC’s sensitivity analysis reveals that the project cash flow can withstand moderate stresses arising from construction cost overruns and traffic underperformance. The project cash flow is vulnerable to a breach in the minimum FSCR covenant of 1.50 times in 2022 should the construction cost overrun exceed 10%. DUKE 3’s finance service ability would also come under pressure in the event of a 20% reduction in the overall projected traffic volume. Under these stressed scenarios, DUKE 3 is expected to defer most of its debt obligations on the RIA to protect sukuk holders from a further weakening of the cash flow coverage. Sukuk holders are protected from prolonged construction delay of up to 18 months as the prefunded finance service reserve is sufficient to cover the first three semi-annual profit payments.
The stable outlook incorporates MARC’s expectation that the project sponsor will adhere to the predetermined capital commitment under the financing structure and the construction of DUKE Phase 3 will progress on schedule and within budget.
Interested?
Refer to the MARC Definitive Ratings Guide for rating definitions (PDF, page 54)
Saturday, 27 February 2016
MARC rates Putrajaya Bina's sukuk wakalah programme AAAIS
Ratings corporation MARC has assigned a preliminary rating of AAAIS with a stable outlook to Putrajaya Bina's (PB's) proposed Islamic medium-term notes (sukuk wakalah) programme of up to RM1.58 billion. 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)".
Proceeds from the issuance will part fund the RM1.9 billion development costs for nine blocks of government office buildings and one block of shared facilities that PB will undertake under a concession from the Malaysian government.
Based on a private finance initiative, the development entails two phases: three and a half years for construction and 25 years for asset maintenance. Putrajaya Holdings (PJH), as a PB shareholder, will contribute RM380 million in the form of shareholders’ advances to meet an 80:20 finance-equity ratio requirement. Upon completion of construction and one month after receipt of the certificate of acceptance, PBSB will be entitled to receive concession payments in the form of availability charges (AC) of RM215.6 million per annum and asset management service charges (MC) of RM69.2 million per annum for tenancy of the building from various ministries and government agencies.
The assigned rating is driven by the credit strength of the government which provides the AC and MC payments over the tenure of the sukuk wakalah programme. The sufficiency of the quantum of the annual AC payments alone without considering the MC payments to meet the principal and profit payments under the sukuk wakalah programme is also a key consideration. The rating also incorporates an irrevocable and unconditional letter of support (LoS) from PJH to meet PBSB’s financial obligations, including any cost overruns during the construction period. MARC maintains a long-term rating of AAA/stable on PJH.
The project construction, which commenced in Q415 and is expected to be completed by Q418 is being undertaken by Sunway Construction under a fixed-price contract. MARC considers the completion and cost overrun risks to be mitigated by the moderate complexity of the project, the established track record of the principal contractor Sunway Construction and the terms of the fixed-price contract. PJH’s obligations under the LoS which will remain effective until the date of the first AC or MC payment, whichever is later, alleviates the payment risk in the event of delay. Notwithstanding this, should the concession be terminated during the asset management period on default of the government, PB will be entitled to a compensation amount of the net present value of foregone future AC payments discounted at the company’s weighted average cost of capital.
Interested?
Find out more about MARC's rating definitions (PDF; from page 53)
Proceeds from the issuance will part fund the RM1.9 billion development costs for nine blocks of government office buildings and one block of shared facilities that PB will undertake under a concession from the Malaysian government.
Based on a private finance initiative, the development entails two phases: three and a half years for construction and 25 years for asset maintenance. Putrajaya Holdings (PJH), as a PB shareholder, will contribute RM380 million in the form of shareholders’ advances to meet an 80:20 finance-equity ratio requirement. Upon completion of construction and one month after receipt of the certificate of acceptance, PBSB will be entitled to receive concession payments in the form of availability charges (AC) of RM215.6 million per annum and asset management service charges (MC) of RM69.2 million per annum for tenancy of the building from various ministries and government agencies.
The assigned rating is driven by the credit strength of the government which provides the AC and MC payments over the tenure of the sukuk wakalah programme. The sufficiency of the quantum of the annual AC payments alone without considering the MC payments to meet the principal and profit payments under the sukuk wakalah programme is also a key consideration. The rating also incorporates an irrevocable and unconditional letter of support (LoS) from PJH to meet PBSB’s financial obligations, including any cost overruns during the construction period. MARC maintains a long-term rating of AAA/stable on PJH.
The project construction, which commenced in Q415 and is expected to be completed by Q418 is being undertaken by Sunway Construction under a fixed-price contract. MARC considers the completion and cost overrun risks to be mitigated by the moderate complexity of the project, the established track record of the principal contractor Sunway Construction and the terms of the fixed-price contract. PJH’s obligations under the LoS which will remain effective until the date of the first AC or MC payment, whichever is later, alleviates the payment risk in the event of delay. Notwithstanding this, should the concession be terminated during the asset management period on default of the government, PB will be entitled to a compensation amount of the net present value of foregone future AC payments discounted at the company’s weighted average cost of capital.
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Find out more about MARC's rating definitions (PDF; from page 53)
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Thursday, 25 February 2016
MARC upbeat on Cerah Sama's RM420 million sukuk
MARC has affirmed its rating of AAIS on Cerah Sama’s RM420.0 million sukuk with a stable outlook. Cerah Sama is the investment holding company of Grand Saga, the concessionaire of the 11.5-km Cheras-Kajang Highway. AA ratings from MARC denote "a very strong ability to make payment on the instrument issued under the Islamic financing contract(s). Risk is slight with degree of certainty for timely payment marginally lower than for instruments accorded the highest rating".
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Find out more about MARC's rating definitions (PDF; from page 53)
Cerah Sama also serves as an investment vehicle of its major shareholders, Taliworks Corporation and Employees Provident Fund (EPF), for potential brownfield toll assets in Malaysia and overseas.
The affirmed rating considers the highway’s strong operational track record and its resilient traffic performance against a recent toll hike. The rating also takes into account Cerah Sama’s satisfactory financial position and coverage ratios. Factors constraining the rating include an increased repayment risk associated with a weakening leverage position and the potential impact on traffic volume from the Klang Valley Mass Rapid Transit (MRT) project.
Traffic volume on the Cheras-Kajang Highway picked up in 2015, reversing yearly declines since the commencement of MRT works in 2012. The completion of the majority of groundworks along the affected stretches of the highway in 1H15 has helped alleviate peak-hour congestion due to less frequent lane closures. The recent toll hike increases in October 2015 have seen its overall daily traffic volume decline by less than 2% in the first two weeks, reflecting the inelastic nature of the Cheras-Kajang Highway. MARC expects the highway’s traffic to fully recover from the toll increases and achieve the targeted traffic performance growth of 1% in 2016.
The affirmed rating considers the highway’s strong operational track record and its resilient traffic performance against a recent toll hike. The rating also takes into account Cerah Sama’s satisfactory financial position and coverage ratios. Factors constraining the rating include an increased repayment risk associated with a weakening leverage position and the potential impact on traffic volume from the Klang Valley Mass Rapid Transit (MRT) project.
Traffic volume on the Cheras-Kajang Highway picked up in 2015, reversing yearly declines since the commencement of MRT works in 2012. The completion of the majority of groundworks along the affected stretches of the highway in 1H15 has helped alleviate peak-hour congestion due to less frequent lane closures. The recent toll hike increases in October 2015 have seen its overall daily traffic volume decline by less than 2% in the first two weeks, reflecting the inelastic nature of the Cheras-Kajang Highway. MARC expects the highway’s traffic to fully recover from the toll increases and achieve the targeted traffic performance growth of 1% in 2016.
For the first ten months of 2015 (10M15), the average daily traffic volume of the Batu 9 and Batu 11 toll plazas recorded year-on-year (YoY) growth of 2.1% and 5.6% respectively. In line with the traffic growth, Cerah Sama’s toll revenue collection for the same period increased by 4.2% YoY to RM50.2 million (10M14: RM48.2 million).
The company distributed a sizeable dividend payout of RM148.0 million in 10M2015 (2014: RM10 million, 2013: nil, 2012: nil); resulting in a debt-to-equity (DE) ratio and short-term liquidity position of 3.89 times and RM96.2 million (10M14: 1.76 times; RM160 million) respectively. Based on the latest cash flow projection, the company plans to distribute on average RM42.8 million in the next five years which would result in its DE ratio moving closer to the covenanted level of 4.5 times. Moderating MARC’s concern is Cerah Sama’s liquidity buffer indicated by the post-distribution finance service coverage ratio ranging from 2.17 to 6.08 times. MARC’s sensitivity analysis demonstrates that Cerah Sama’s cash flow is able to withstand a moderate traffic underperformance (annual traffic volume of 7% below projections) as well as a toll hike deferral.
The stable outlook incorporates MARC’s expectation of a stable traffic profile for the Cheras-Kajang Highway and the timely receipt of the government compensation. MARC also expects Cerah Sama and its subsidiaries to maintain a prudent approach to financial management with regard to acquisitions and expansion. Downward pressure on the ratings and/or outlook may result if Cerah Sama’s credit profile changes materially in the event of a sizeable business acquisition or a severe traffic underperformance on the Cheras-Kajang Highway.
The company distributed a sizeable dividend payout of RM148.0 million in 10M2015 (2014: RM10 million, 2013: nil, 2012: nil); resulting in a debt-to-equity (DE) ratio and short-term liquidity position of 3.89 times and RM96.2 million (10M14: 1.76 times; RM160 million) respectively. Based on the latest cash flow projection, the company plans to distribute on average RM42.8 million in the next five years which would result in its DE ratio moving closer to the covenanted level of 4.5 times. Moderating MARC’s concern is Cerah Sama’s liquidity buffer indicated by the post-distribution finance service coverage ratio ranging from 2.17 to 6.08 times. MARC’s sensitivity analysis demonstrates that Cerah Sama’s cash flow is able to withstand a moderate traffic underperformance (annual traffic volume of 7% below projections) as well as a toll hike deferral.
The stable outlook incorporates MARC’s expectation of a stable traffic profile for the Cheras-Kajang Highway and the timely receipt of the government compensation. MARC also expects Cerah Sama and its subsidiaries to maintain a prudent approach to financial management with regard to acquisitions and expansion. Downward pressure on the ratings and/or outlook may result if Cerah Sama’s credit profile changes materially in the event of a sizeable business acquisition or a severe traffic underperformance on the Cheras-Kajang Highway.
Interested?
Find out more about MARC's rating definitions (PDF; from page 53)
Saturday, 13 February 2016
Sime Darby's Perpetual Subordinated Sukuk Programme gets AAIS rating from MARC
MARC has assigned a preliminary rating of AAIS to Sime Darby's Perpetual Subordinated Sukuk Programme of up to RM3 billion, and has affirmed the ratings of MARC-1ID/AAAID on the existing RM4.5 billion Islamic medium term note (IMTN) programme and RM500 million Islamic commercial paper/Islamic medium term note (ICP/IMTN) programme with a combined limit of RM4.5 billion.
AA ratings from MARC denote "a very strong ability to make payment on the instrument issued under the Islamic financing contract(s). Risk is slight with degree of certainty for timely payment marginally lower than for instruments accorded the highest rating", against AAA ratings, "extremely strong ability to make payment on.the instrument issued..". MARC-1 ratings also refer to an "extremely strong capacity to make timely payment on the instrument issued under the Islamic financing contract(s)".
The rating outlook on the Perpetual Sukuk programme is negative, consistent with the revised outlook on the ICP/IMTN to negative from stable. The two-notch rating differential between the Perpetual Sukuk and IMTN is in line with MARC’s notching principles on hybrid securities.
The negative outlook revision factors in the slower-than-expected pace of measures initiated thus far to address the substantial increase in group borrowings following the debt-funded acquisition of New Britain Palm Oil Limited (NBPOL) for RM6 billion in March 2015. Some of the group’s earlier plans to pare down its debt have been postponed owing to weak market conditions. Additionally, the group’s key business segments have continued to face a tough operating environment, leading to weaker earnings and cash flow generation that have put pressure on its credit metrics. These factors notwithstanding, the affirmed ratings reflect Sime Darby’s geographical diversity of and significant market position in the oil palm plantation, property, motors and industrial segments. The group’s strong financial flexibility which also stems from its status as a government-linked corporation supports the rating affirmation.
MARC notes that Sime Darby’s plan to issue the Perpetual Sukuk is a major first step to improve the group’s liquidity profile; initial proceeds from the issuance would be utilised to meet upcoming financial obligations. As the Perpetual Sukuk receives 50% equity credit in line with MARC’s approach in evaluating hybrid securities, group debt-to-equity would improve to 0.53 times from 0.60 times, assuming the full drawdown of RM3 billion is utilised for debt repayment. MARC understands that the group is working on other initiatives to strengthen its balance sheet, including equity placements, monetising non-core assets and divestments. Nonetheless, MARC remains concerned on the implementation timeline given the prevailing challenging conditions.
The low crude palm oil (CPO) price environment has continued to weigh on the Plantation division’s performance; the average CPO selling price was lower at RM2,193/metric ton (MT) for the financial year ended June 30, 2015 (FY2015) (FY2014: RM2,451/MT). Despite an increase in fresh fruit bunch production, owing to NBPOL’s contribution from its 82,068 hectares (ha) of cultivated oil palm since its acquisition in March 2015, the Plantation division’s revenue and profit before interest and tax (PBIT) declined by 6.3% year on year (YoY) and 38.8% YoY to RM10,268.6 million and RM1,148.1 million in FY2015.
The group’s Industrial division continues to be affected by lower heavy equipment sales due mainly to the weak Australian mining sector. For FY2015, the division’s revenue and PBIT declined by 9.5% YoY and 48.5% YoY to RM10,558.2 million and RM521.2 million respectively. Its Motors division’s performance was hampered by margin pressures despite recording higher sales; PBIT declined by 25.4% YoY to RM473.6 million against the 5.1% YoY revenue growth to RM18,646.3 million in FY2015. The group’s China motor markets have also been affected by stringent regulations aimed at reducing road congestion and curbing luxury spending. The improved sales were, however, supported by its Vietnam, Australia and New Zealand markets.
The weaker performance of its Plantation, Industrial and Motors divisions were moderated by Sime Darby’s Property division’s improved performance; better sales at its new launches in existing township developments Elmina and Bandar Ainsdale as well as disposal of land parcels and a joint-venture project supported the overall performance during FY2015. The Property division recorded a revenue increase of 23.8% YoY to RM3,455.0 million and PBIT increase of 48.3% YoY to RM889.4 million. MARC notes that the sizeable contracted sales (unbilled sales) of RM1.3 billion as at end-June 2015 will provide earnings visibility over the intermediate term. Additionally, the group’s diverse property mix that includes township developments, sizeable land bank, property investments and foreign property venture should provide a buffer against headwinds in the domestic property sector.
For FY2015, consolidated group revenue declined marginally to RM43.7 billion but PBIT declined by 28.9% YoY to RM3.3 billion. The group incurred higher finance costs due to the increase in borrowings to RM18.1 billion as at end-FY2015. This rose to RM19.7 billion as at end-Q1FY16, leading to gross and net debt/equity (DE) ratios of 0.60 times and 0.49 times respectively. The group has a strong liquidity position with cash balance of about RM4.2 billion as at end-FY2015 in addition to significant unutilised credit lines.
At the holding company level, Sime Darby’s revenue decreased to RM1.3 billion in FY2015 (FY2014: RM2 billion) largely due to lower dividends received from the Plantation and Industrial divisions. The Plantation division is expected to remain the main dividend contributor, having accounted for 47.8% of total dividend income in FY2015 (FY2014: 49.1%).
Downward rating pressure would increase should the performance of the group’s key divisions further weaken its consolidated credit profile. Any revision in the rating outlook to stable would depend on the pace and scale of deleveraging efforts that would restore the group’s financial metrics to its historic level, including the group gearing level between 0.30 times and 0.40 times.
The negative outlook revision factors in the slower-than-expected pace of measures initiated thus far to address the substantial increase in group borrowings following the debt-funded acquisition of New Britain Palm Oil Limited (NBPOL) for RM6 billion in March 2015. Some of the group’s earlier plans to pare down its debt have been postponed owing to weak market conditions. Additionally, the group’s key business segments have continued to face a tough operating environment, leading to weaker earnings and cash flow generation that have put pressure on its credit metrics. These factors notwithstanding, the affirmed ratings reflect Sime Darby’s geographical diversity of and significant market position in the oil palm plantation, property, motors and industrial segments. The group’s strong financial flexibility which also stems from its status as a government-linked corporation supports the rating affirmation.
MARC notes that Sime Darby’s plan to issue the Perpetual Sukuk is a major first step to improve the group’s liquidity profile; initial proceeds from the issuance would be utilised to meet upcoming financial obligations. As the Perpetual Sukuk receives 50% equity credit in line with MARC’s approach in evaluating hybrid securities, group debt-to-equity would improve to 0.53 times from 0.60 times, assuming the full drawdown of RM3 billion is utilised for debt repayment. MARC understands that the group is working on other initiatives to strengthen its balance sheet, including equity placements, monetising non-core assets and divestments. Nonetheless, MARC remains concerned on the implementation timeline given the prevailing challenging conditions.
The low crude palm oil (CPO) price environment has continued to weigh on the Plantation division’s performance; the average CPO selling price was lower at RM2,193/metric ton (MT) for the financial year ended June 30, 2015 (FY2015) (FY2014: RM2,451/MT). Despite an increase in fresh fruit bunch production, owing to NBPOL’s contribution from its 82,068 hectares (ha) of cultivated oil palm since its acquisition in March 2015, the Plantation division’s revenue and profit before interest and tax (PBIT) declined by 6.3% year on year (YoY) and 38.8% YoY to RM10,268.6 million and RM1,148.1 million in FY2015.
The group’s Industrial division continues to be affected by lower heavy equipment sales due mainly to the weak Australian mining sector. For FY2015, the division’s revenue and PBIT declined by 9.5% YoY and 48.5% YoY to RM10,558.2 million and RM521.2 million respectively. Its Motors division’s performance was hampered by margin pressures despite recording higher sales; PBIT declined by 25.4% YoY to RM473.6 million against the 5.1% YoY revenue growth to RM18,646.3 million in FY2015. The group’s China motor markets have also been affected by stringent regulations aimed at reducing road congestion and curbing luxury spending. The improved sales were, however, supported by its Vietnam, Australia and New Zealand markets.
The weaker performance of its Plantation, Industrial and Motors divisions were moderated by Sime Darby’s Property division’s improved performance; better sales at its new launches in existing township developments Elmina and Bandar Ainsdale as well as disposal of land parcels and a joint-venture project supported the overall performance during FY2015. The Property division recorded a revenue increase of 23.8% YoY to RM3,455.0 million and PBIT increase of 48.3% YoY to RM889.4 million. MARC notes that the sizeable contracted sales (unbilled sales) of RM1.3 billion as at end-June 2015 will provide earnings visibility over the intermediate term. Additionally, the group’s diverse property mix that includes township developments, sizeable land bank, property investments and foreign property venture should provide a buffer against headwinds in the domestic property sector.
For FY2015, consolidated group revenue declined marginally to RM43.7 billion but PBIT declined by 28.9% YoY to RM3.3 billion. The group incurred higher finance costs due to the increase in borrowings to RM18.1 billion as at end-FY2015. This rose to RM19.7 billion as at end-Q1FY16, leading to gross and net debt/equity (DE) ratios of 0.60 times and 0.49 times respectively. The group has a strong liquidity position with cash balance of about RM4.2 billion as at end-FY2015 in addition to significant unutilised credit lines.
At the holding company level, Sime Darby’s revenue decreased to RM1.3 billion in FY2015 (FY2014: RM2 billion) largely due to lower dividends received from the Plantation and Industrial divisions. The Plantation division is expected to remain the main dividend contributor, having accounted for 47.8% of total dividend income in FY2015 (FY2014: 49.1%).
Downward rating pressure would increase should the performance of the group’s key divisions further weaken its consolidated credit profile. Any revision in the rating outlook to stable would depend on the pace and scale of deleveraging efforts that would restore the group’s financial metrics to its historic level, including the group gearing level between 0.30 times and 0.40 times.
Interested?
Refer to MARC's rating definitions (PDF, from page 53)
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.
Interested?
Find out more about MARC's rating definitions (PDF; from page 53)
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.
Interested?
Find out more about MARC's rating definitions (PDF; from page 53)
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