Stratavest Sdn Bhd - 2007

MARC has assigned the rating of AA- IS to independent power producer, Stratavest Sdn Bhd’s (Stratavest) RM120.0 million Nominal Value Sukuk Ijarah (Sukuk Ijarah). Stratavest operates a 60MW diesel fired power plant (Libaran Power Plant) in Sandakan, Sabah. Proceeds from the issuance of the Sukuk Ijarah will be utilised largely to finance the purchase and/or early redemption of Stratavest’s outstanding Al-Bai’ Bithaman Ajil (ABBA) bonds and to finance advances of RM31.3 million to Stratavest’s shareholder, Eden Inc Berhad (Eden). The outlook on the rating is stable. 

This financing, which is expected to result in a slight deterioration in Stratavest’s debt leverage, reflects a decision on the part of Eden to leverage its subsidiary’s balance sheet to meet holding company level working capital and capital investment needs. Notwithstanding, Stratavest’s financial profile is expected to steadily improve with the refinancing of its ABBA Bonds, due 2010, with the sukuk. MARC has taken cognizance of the occurrence of a technical breach of covenants with Stratavest’s earlier bonds issuance. However, the refinancing adequately addresses any potential recurrence of such breaches and further lapses in corporate governance with the much improved structural protections for sukuk investors. These include a pre-funded six-month sukuk service reserve, designated revenue accounts, a clear cash flow waterfall with limitations on transfers in respect of operating expenses, tight financial covenants and limitations on distributions to shareholders. The refinancing will also allow Stratavest to extend the maturity profile of its external funding to match the remaining tenure of its PPA.

The AA-IS rating reflects the highly predictable cash flow generated by Libaran Power Plant, which is supported by a 21-year power purchase agreement (PPA) with Sabah Electricity Sdn Bhd (SESB), low off-taker risk, and good operational performance of the plant as reflected in its continued achievement of availability and heat rate requirements under the PPA. The PPA, which expires in December 2019, insulates Stratavest from demand and fuel price risks while revenue collection risk is mitigated by SESB’s current satisfactory payment record and 80% ownership by Tenaga Nasional Berhad (rated AA+). A long term supply agreement signed with Petronas Dagangan Berhad mitigates fuel supply risk. The rating also takes into account the strong average and minimum sukuk service cover ratios (SSCRs) of 9.55 times and 4.69 times respectively under base case assumptions during the tenure of the sukuk which begins amortizing in 2009. The  SSCRs incorporate  declining  capacity payments over the remaining concession tenure commencing from 2011 stemming from a scheduled reduction in its capacity rate by RM21.10 per kWh/month. Moderating these strengths are the issuer’s exposure to single project risk, the risk of higher than anticipated operating and maintenance (O&M) costs, its shareholder’s lower credit quality and its limited financial flexibility.

Stratavest’s revenue, which is comprised of capacity and energy payments, grew at a compounded annual growth rate (CAGR) of 12.9% over the past four years to FY2007. Reflecting the continued rise in fuel costs, Stratavest received 74% of revenue in energy payments in FY2006 as compared to 40% in FY2003. Its operating profit before net financing costs declined to RM17.6 million in FY2007 as compared to RM22.9 million in the previous year on account of increasing cost incurred in overhaul and maintenance activities. Apart from the lower earnings, Stratavest’s cash flow generation was also affected by the high receivables on its books. MARC expects that the improvement in revenue collection from SESB as observed in recent periods will be sustained in the coming months and will support anticipated improvements in cash flow certainty and stability, going forward.

The stable outlook reflects MARC’s expectations that upon completion of its debt refinancing exercise, Stratavest will exhibit stronger debt-servicing capacity as consistent with its rating level.

Major Rating Factors

Strengths

• Power Purchase Agreement insulates issuer from demand and fuel price risks over its tenure;
• Monthly capacity payments provide highly predictable and stable cash flows to service the sukuk;
• Plant’s continued achievement of availability and heat rate requirements under the PPA ; and
• Tight covenant package and adequate structural protection.

Challenges/Risks

• Downward pressure on profitability exerted by increasing cost of maintaining the plant’s engines;
• Exposure to shareholder’s lower credit quality; and
• Limited financial flexibility.