TANJUNG BIN O&M BHD - 2015

MARC has affirmed its AA-_IS rating on Tanjung Bin O&M Berhad’s (Tanjung Bin O&M) RM470.0 million Islamic Securities (Sukuk Wakalah) with a stable outlook. Tanjung Bin O&M is the main operator of the 2,100-megawatt (MW) coal-fired power plant owned by related entity Tanjung Bin Power Sdn Bhd (TBP). The issuer’s key operational obligations under the O&M agreement (OMA) with TBP have been transferred to parent company Malakoff Power Berhad (MPower) via a sub-OMA; both the OMA and sub-OMA are co-terminous with the 25-year power purchase agreement between TBP and Tenaga Nasional Berhad (TNB).

The affirmed rating incorporates the satisfactory operational performance of the TBP plant since the completion of the boiler improvement programme in March 2014, the adequacy of the cash trap mechanism under the transaction structure and the strength of the unconditional and irrevocable cash deficiency support provided by parent company MPower. The cash deficiency support will require MPower (rated AA-/Stable) to top up any shortfall in Tanjung Bin O&M’s finance service reserve account (FSRA) funding requirement. MARC notes that MPower has fulfilled an undertaking to make full payments to TBP for the liquidated ascertained damages (LAD) incurred by Tanjung Bin O&M in relation to a number of unscheduled outages in 2013; the parent company also absorbed the expenses related to the boiler improvement works pursuant to TBP’s recovery programme.

For 2014, the plant’s average capacity factor improved sharply to 83.2% (2013: 64.0%), leading to an 18.8% increase in Tanjung Bin O&M’s revenue to RM323.5 million (2013: RM272.4 million) and its first profit before tax of RM42.8 million (2013: loss before tax of RM178.6 million). Operating cash flow (CFO) rose to RM74.9 million (2013: negative RM402.0 million), providing adequate coverage against sukuk obligations comprising a principal redemption of RM20.0 million and semi-annual profit payments totalling RM22.4 million. In addition, Tanjung Bin O&M’s FSRA has been adequately funded to meet upcoming payments of RM60.8 million due on the Sukuk Wakalah on July 1, 2015. MARC highlights Tanjung Bin O&M’s continued weak current ratio of 0.56 times (x) in 2014 (2013: 0.48x) but notes that this arose mainly from non-trade payables of RM214.5 million which are due to MPower and ultimate holding company Malakoff Corporation Berhad. The non-trade payables are considered akin to equity as any claim on the payables is expected to be conditional upon the adequacy of the liquidity buffer to meet the issuer’s payment obligations and maintenance of the 80:20 covenanted debt-to-equity ratio.

The updated base case cash flow projections demonstrate Tanjung Bin O&M’s ability to maintain sound finance service cover ratios (FSCR) of at least 2.10x before distribution. MARC’s sensitivity analysis shows that Tanjung Bin O&M would be able to meet its sukuk obligations and maintain compliance with the 1.25x minimum FSCR covenant on a standalone basis under moderate stress scenarios on the condition that dividend payouts remain moderate in the years when no redemptions on the Sukuk Wakalah are scheduled. However, under a severe stress of persistent underperformance of the plant and/or drop in electricity demand from TNB, Tanjung Bin O&M’s FSCR is expected to fall below 1.00x (if the plant’s capacity factor averages below 59.0%). Should this occur, MARC expects MPower to provide timely cash injections into Tanjung Bin O&M’s FSRA under the cash deficiency support mechanism.

The stable outlook reflects MARC’s expectations that the plant will continue to demonstrate satisfactory operational performance and high despatch levels. Changes to the rating and outlook of the Sukuk Wakalah would be largely driven by changes in the financial profile of MPower, the provider of cash deficiency support.

Major Rating Factors

Strengths

• Fairly predictable cash flows from operations and maintenance (O&M) of Tanjung Bin power plant;
• Cash deficiency support from ‘AA-’ rated parent Malakoff Power Berhad (MPower); and
• Operational risks mostly transferred to MPower through a subcontract O&M agreement (sub-OMA).

Challenges/Risks

• Operational performance of Tanjung Bin power plant; and
• Sensitivity of variable operating revenues to demand risk.