Ranhill Power Sdn Bhd - 2011

MARC has assigned ratings of AAAIS(bg) to the bank-guaranteed sukuk and AAAIS(fg) to the Danajamin Nasional Berhad (Danajamin) guaranteed sukuk to be issued under Ranhill Power Sdn Bhd's (Ranhill Power) RM800 million Sukuk Musharakah facility. The outlook for both ratings is stable. The bank-guaranteed sukuk of up to RM300 million (Tranche 1) will have tenures up to eight years while the Danajamin-guaranteed sukuk of up to RM500 million (Tranche 2) will have tenures ranging from nine to 15 years. The proceeds from the sukuk offerings will be mostly onlent to Ranhill Berhad to redeem its USD220.0 million notes issue maturing in October 2011. The issuance of the sukuk will mitigate the refinancing risk related to Ranhill Berhad’s upcoming debt maturities and related liquidity concerns.

The rating assigned to Tranche 1 reflects the credit strength of an unconditional and irrevocable guarantee provided by Maybank Islamic Berhad (MIB), which MARC currently rates AAA/Stable. Meanwhile, the rating assigned to Tranche 2 reflects the credit strength of an unconditional and irrevocable Kafalah Guarantee provided by Danajamin Nasional Bhd, also rated AAA/Stable by MARC.

The issuer is a wholly-owned subsidiary of Bursa Malaysia-listed Ranhill Berhad, a diversified group involved mainly in the water, power, infrastructure, petroleum and chemicals business segments. Ranhill Power is also the intermediate holding company for the group's power generation projects. A significant proportion of future cash flow available to service the rated debt is expected to come from dividends distributed by SAJ Holdings Sdn Bhd (SAJH), a potable water provider in the state of Johor. Ranhill Berhad holds an effective 56% share in SAJH through its 70%-owned subsidiary, Ranhill Utilities Sdn Bhd. Dividend distributions from two independent power generation projects located in the state of Sabah are also expected to support repayment of the sukuk. The sukuk is subordinated to obligations of the power generation project companies, Ranhill Powertron Sdn Bhd (RPI) and Ranhill Powertron II Sdn Bhd (RPII).

The debt structure creates a high degree of linkage between the standalone credit profile of the rated sukuk and Ranhill Berhad, which will instruct the aforementioned subsidiaries to make all payments including, but not limited to dividends, directly into a designated revenue account. With respect to its Tranche 1 and Tranche 2 sukuk, Ranhill Berhad is required to maintain a finance service cover ratio (FSCR) of 1.50 times for financial years 2012 and 2013, and 1.75 times thereafter. Ranhill Berhad's ability to raise additional debt at the holding company level is subject to its maintenance of a debt-to-EBITDA ratio of not more than five times from year 3 onwards.

MARC believes that the covenant package will provide meaningful downside protection from large debt-financed acquisitions or investments by Ranhill Berhad which could weaken debt protection measures and entail higher business risk. As the ultimate holding company for infrastructure businesses, Ranhill Berhad receives residual cash flow sourced from dividends and capital repayments from its subsidiaries, which MARC regards as less reliable than direct access to operating cash flows. Nevertheless, this risk is partly offset by the stable utility-like characteristics of the current and expected income stream of SAJH, RPI and RPII.

As Johor’s only distributor of potable water, SAJH continues to retain a robust financial profile after migrating to a new licensing regime. The new regime provides SAJH with stable cash flow generation without having to shoulder sizeable capital expenditure obligations and associated debt. The licence is subject to renewal every three years; licence renewal risk is, nonetheless, currently moderated by SAJH's good operating track record. The dividend upstreaming capacity of RPI and RPII, meanwhile, is underpinned by the favorable long-term offtake arrangements with the state’s electricity utility company, Sabah Electricity Sdn Bhd, and strong demand fundamentals of the two gas-fired combined cycle power plants which have a total generating capacity of 380MW. Cash flows from RPI and RPII are, however, sensitive to changes over time in operational performance.

MARC notes the company's assumption of no dividends from RPI prior to the fiscal year ending June 2014 in its base case financial projections. Likewise, the company expects minimal cash flow from RPII to be available to support debt service on the rated sukuk up to fiscal year 2016. The modest debt amortisation requirements prior to year 4 mitigate the risk of a draw on Ranhill Power's debt service reserve funds. Financial projections demonstrate that under most adverse conditions, adequate cash exists to service debt obligations.

The standalone credit profile of the rated sukuk is constrained by Ranhill Berhad's other non-infrastructure businesses which possess higher-than-average business risk profiles. The guarantees provided by MIB and Danajamin insulate sukukholders from downside risks in relation to the creditworthiness of Ranhill Berhad and Ranhill Power, including significantly lower-than-expected residual cash flows to Ranhill Berhad against original base case projections.

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