CREDIT ANALYSIS REPORT

Malakoff Power Bhd - 2013

Report ID 4434 Popularity 2964 views 348 downloads 
Report Date Jan 2013 Product  
Company / Issuer Malakoff Power Bhd Sector Infrastructure & Utilities - Power
Price (RM)
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Rationale

MARC has assigned long-term and short-term programme ratings of AA-IS and MARC-1IS respectively to Malakoff Power Bhd’s (MPower) RM5.6 billion Murabahah Securities Facility and RM300.0 million Islamic Commercial Paper (ICP) Programme (collectively referred as Sukuk Murabahah Facility). The outlook on the ratings is stable.

MPower is a wholly-owned subsidiary of Malakoff Corporation Berhad (Malakoff), an investment holding company that has, via its subsidiaries and associates, effective power generating capacity of 5,020 megawatt (MW) in the country. Incorporated for the purpose of facilitating Malakoff Group’s corporate restructuring, MPower will acquire the power plant operation and maintenance (O&M) business of Malakoff and loan stocks in four independent power producers (IPP) in which Malakoff has ownership interests ranging from 75% to 100% for RM4.17 billion. The consideration of this sale will be funded by the issuance of the rated Sukuk Murabahah Facility. The balance of the sukuk proceeds amounting to RM1.23 billion will be on lent to Malakoff. Subsequent to this issuance, all of the holding company’s senior debt will be retired. The four IPPs, Tanjung Bin Power Sdn Bhd (TBP), Segari Energy Ventures Sdn Bhd (SEV), GB3 Sdn Bhd (GB3) and Prai Power Sdn Bhd (PPSB), respectively hold the concessions for the 2,100MW Tanjung Bin coal-fired power plant, the 1,303MW combined-cycle gas turbine (CCGT) Lumut power plant, the 640MW CCGT Lumut GB3 power plant and the 350MW CCGT Prai power plant.

The assigned ratings to MPower reflect: 

  1. the low business risk profile of MPower’s operation and maintenance (O&M) operating subsidiaries, and the power plant portfolio which provides the majority of underlying cash flows that will service the sukuk;
  2. the good operational performance of the power plant portfolio and its predictable stable cash flow generation;
  3. base case minimum and average projected finance service coverage ratios (FSCR) of 1.04 times (x) and 4.15x at MPower and combined minimum and average projected debt FSCRs of 1.38x and 10.31x respectively, excluding Malakoff’s operating subsidiaries; and
  4. the low payment deferral risk on the RM1.89 billion of loan stocks held by MPower in SEV, GB3 and PPSB which have fairly low levels of outstanding project debt.

The long-term AA-IS rating is constrained by:

  1. moderate diversity of cash flow sources and dependence on TBP’s cash flows which is expected to account for a large portion of MPower’s future cash flows to service the sukuk;
  2. the residual nature of MPower’s claim on TBP’s cash flows (after senior debt service has been paid and a projected debt FSCR distribution test of 1.65x is met at TBP’s level) although its debt service is expected to be low until 2018; and
  3. the limited protection provided by the terms governing the sukuk against leveraging at parent company Malakoff and Malakoff group level that could elevate the parent’s credit risk profile and have negative spillover effects on MPower.

The ratings also incorporate MPower’s significant linkages to the credit profile of its parent as a result of Malakoff’s and MPower’s common dependence on the residual cash flows of the parent company’s power plant portfolio after project-level debt service. MPower and Malakoff each have a claim on the cash flows of the four IPPs as debt-holder, by virtue of various loan stocks, and shareholder respectively. Of particular significance is MPower’s higher priority-of-claim position relative to Malakoff on account of the RM1.03 billion of existing loan stock holdings in Tanjung Bin Power Sdn Bhd (TBP), GB3 Sdn Bhd (GB3) and Prai Power Sdn Bhd (PPSB) as well as the RM1.96 billion of newly issued loan stocks of TBP and Segari Energy Ventures Sdn Bhd (SEV) transferred by Malakoff pursuant to the corporate restructuring of Malakoff Group.

MARC perceives a fairly high degree of credit linkage between MPower and Malakoff on account of the RM1.23 billion inter-company loan to the parent. Accordingly, Malakoff’s credit profile will remain a primary rating driver for MPower over the tenure of the sukuk. In this regard, MARC believes that the corporate guarantee provided by Malakoff in respect of the sukuk issuance demonstrates the latter’s commitment to maintaining a sound repayment capacity at both MPower and at holding company level.

Malakoff’s remaining debt obligations subsequent to the aforementioned restructuring exercise will be limited to its 30-year callable RM1.8 billion Unrated Junior Sukuk which will be refinanced pending its relisting on Bursa Malaysia in early 2013 and a US$90 million term loan. As an investment holding company, Malakoff will be dependent on dividend income and advances from its operating subsidiaries to meet its financial obligations; the coal-fired power generation assets of TBP and Tanjung Bin Energy Sdn Bhd (TBE) are expected to provide 65.3% of Malakoff’s projected dividend income between 2012 and 2025. TBP is expected to upstream projected dividends of RM4.65 billion and TBE, RM1.10 billion over the 13-year period. The FSCR distribution test of 1.75x at Malakoff provided by the terms governing the sukuk offers additional comfort that dividend distributions by the holding company post-listing will not diminish its ability to build up liquidity ahead of sizeable sukuk maturities in 2019, 2022 and 2025.

The financial projections of MPower indicate that the main cash flow sources for MPower in the first five years of the facility, between 2012 and 2017, will be principal repayments and interest paid on the loan stocks of SEV and TBP. Thereafter, Malakoff (and TBP indirectly) will provide the majority of MPower’s debt servicing requirements. Proceeds from Malakoff’s loan repayment to MPower and the purchase undertaking by Malakoff are expected to collectively provide RM720.0 million of cash flow for scheduled sukuk repayments between 2019 and 2025. The PPAs of GB3 and PPSB will expire in 2022 and 2024 respectively, while project-level debt will be fully paid down by 2014 and 2016, allowing project cash flow to be largely applied towards loan stock and dividend payments after the retirement of senior debt at project level. MARC performed sensitivity analyses to test the impact on the combined FSCRs of reduced distributions from TBP to Malakoff and found the FSCRs to be relatively resilient. The FSCRs could decline if the IPPs encounter significant operational problems but MARC regards Malakoff Group’s strong O&M capabilities as an important risk mitigant against operational risk. The competitiveness of Malakoff’s coal-fired power generating capacity based on merit order further underpins the rating agency’s expectation of predictable cash flow generation.

The stable outlook reflects the power plant portfolio’s long-term power purchase agreements (PPA) with a strong offtaker and dispatch profiles that are supportive to the issuer’s credit profile and which provide stability in project-level cash flow generation. MARC also assumes that any additional sizeable investment to expand Malakoff’s power plant portfolio will be followed or preceded by a strengthening of its capitalisation to ensure no material weakening of its financial profile unless the acquisition or investment is immediately accretive to its discretionary cash flow. The ratings or outlook could come under negative pressure if combined cash flow coverage declines below 1.30x over the next 12 to 18 months or if Malakoff’s financial profile deteriorates.

Major Rating Factors

Strengths

  • High cash flow predictability of repayment sources;
  • Strong operational performance of power plant portfolio providing the majority of cash flows; and
  • Low payment deferral risk on MPower’s loan stock holdings in power project entities other than TBP.

Challenges/Risks

  • Heavy reliance on residual cash flow from TBP; and
  • High consolidated leverage at Malakoff Group level.
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