CREDIT ANALYSIS REPORT

QUANTUM SOLAR PARK (SEMENANJUNG) SDN BHD - 2017

Report ID 5490 Popularity 370 views 0 downloads 
Report Date Sep 2017 Product  
Company / Issuer Quantum Solar Park (Semenanjung) Sdn Bhd Sector Infrastructure & Utilities - Power
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Normal: RM500.00        
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Rationale

MARC has assigned a preliminary rating of AA-IS to Quantum Solar Park (Semenanjung) Sdn Bhd’s (QSP Semenanjung) Green SRI Sukuk of up to RM1.0 billion. The outlook on the rating is stable. QSP Semenanjung is a wholly-owned subsidiary of Quantum Solar Park Malaysia Sdn Bhd, with the latter’s ownership interest equally divided among ItraMAS Technology Sdn Bhd (ItraMAS), MalTechPro Sdn Bhd (MalTechPro) and CamLite Sdn Bhd (CamLite)

Proceeds raised from the Green SRI Sukuk will be utilised to construct three 50-megawatt alternating current (50MWac) solar photovoltaic (PV) power plants concurrently, one each in Gurun (Kedah), Merchang (Terengganu) and Jasin (Melaka) owned by QSP Semenanjung’s three wholly-owned project companies. QSP Semenanjung will be the largest solar power producer in the country with a combined capacity of 150MWac. The total project cost of about RM1.24 billion will be funded on an 80:20 sukuk-to-equity financing basis. The equity of about RM251.5 million will be injected in QSP Semenanjung in two stages whereby the sponsors undertake to inject at least RM70 million prior to the issuance of the Green SRI Sukuk and the remaining balance is to be injected before any of the project companies pay 90% of the amount payable under their respective engineering, procurement and construction (EPC) contracts or before any of the project company’s balance in the designated accounts falls below RM10 million. The equity portion is backed by a bank guarantee from a financial institution that carries a domestic rating of AAA or its equivalent from a rating agency

The rating primarily reflects the adequate projected cash flow coverage on the back of the 21-year solar power purchase agreements (SPPA) with Tenaga Nasional Berhad (TNB), on which MARC maintains a senior unsecured debt rating of AAA/Stable. The rating also considers the well-structured contract arrangements with respect to the EPC and operations and maintenance (O&M) of the plants. Moderating the rating are the risks associated with project completion, uncertainty around the solar irradiance estimates and overall plant performance.

The fixed-sum EPC contracts have been awarded to Scatec Solar Solutions Malaysia Sdn Bhd (Scatec Malaysia), a wholly-owned subsidiary of Scatec Solar ASA (Scatec). Scatec is a Norwegian-based solar power plant developer and operator of 322MW solar power generating capacity. QSP Semenanjung’s three solar power plants are scheduled to achieve commercial operation date (COD) concurrently on December 31, 2017 upon completion of the 10-month construction programme. MARC has assessed the experience and credit profile of Scatec as adequate to undertake the projects although the construction timeline for the project in Jasin is deemed tight as a result of the late availability of the access road which led to some delays in the commencement of site clearance. MARC understands that the project management team has developed and is currently embarking on an acceleration plan for all the three plants. The plan aims to further reduce the delivery timeline of key equipment, increase machinery and manpower on project sites, increase overall working hours, remobilise of resources and complete more work packages in parallel. Nonetheless, the liquidated damages (LD) provisions under the EPC contracts and the procurement of insurance coverages for delays should address compensation payable to TNB and potential cash flow mismatches arising from any delays.

Upon commencing commercial operations, the project companies would receive stable cash flow streams under the SPPA terms which also include entitlement to payments in the event TNB is not able to accept the plants’ output. The O&M risk is mitigated by performance guarantee provisions under the 18-year O&M agreements (OMA) with Scatec Malaysia. The project companies are also covered by equipment warranties that are in line with acceptable industry standards. Inverter warranties will also be procured for the term of the SPPAs. Additionally, a maintenance reserve which will be built-up to RM12.0 million progressively within the first 10 years will serve as a contingency for any maintenance requirements.

Key assumptions used in the cash flow projections’ base case include one-year P90 energy production levels, panel degradation at a rate of 0.4% per annum and annual escalation rates of 3% in O&M fees. The energy yield analysis has incorporated sufficient modelling of data uncertainty using high quality satellite meteorological data given the lack of ground data sources. Nonetheless, MARC believes that continuous and quality monitoring of on-site data collection during the operational phase is critical in reducing uncertainty in prospective solar irradiance estimates.

The project, based on the P90 resource probability scenario, is expected to have minimum and average finance service cover ratios (FSCR) of 1.56 times and 2.00 times respectively throughout the Green SRI Sukuk tenure. Project debt coverage is deemed satisfactory under MARC’s moderate stress scenarios which include a 4% project cost overrun, six-month delay in project completion or 20% increase in operating expenses. MARC also derives comfort from the fact that the project’s minimum FSCR is a commendable 1.46 times under a P99 resource probability scenario. Construction cost overruns are partly mitigated by the project sponsors’ undertaking to fund any additional project cost of up to RM50 million which is backed by a bank guarantee by a qualifying bank. Providing some cash flow protection under stressed scenarios is the post-distribution FSCR covenant of 1.50 times throughout the Green SRI Sukuk tenure. Cash commingling risks are mitigated through the tight payment waterfall structure and designated accounts controlled by the security agent.

The stable outlook reflects MARC’s expectation that the project will achieve scheduled COD (SCOD) within the allocated budget and the project sponsors will adhere to the pre-determined capital commitment and obligations under the financing structure. Upon successful commencement of operations, the rating may be revised upwards if the project manages to demonstrate that its actual energy output is able to meet or exceed the projected estimates.

Major Rating Factors

Strengths

  • Tariff structure that is supportive of project economics;
  • Satisfactory project debt coverage; and
  • Adequately structured project agreements.

Challenges/Risks

  • Potential project completion delays and cost overruns; and
  • Limited operating track record of large scale solar photovoltaic projects in the region.
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