SINAR KAMIRI SDN BHD - 2018

MARC has assigned a rating of AA-_IS to Sinar Kamiri Sdn Bhd’s (SKSB) proposed Green SRI Sukuk Wakalah of up to RM245.0 million. The outlook on the rating is stable.

Wholly owned by Mudajaya Group Berhad (Mudajaya), SKSB was solely set up to undertake the development and operations of a greenfield solar power generation facility with a capacity of 49.0MWac in Sungai Siput, Perak. The estimated total development cost of the solar project is RM306.3 million. The sukuk proceeds will largely fund the project cost including the repayment of initial funding comprising a RM10.0 million bridging loan and US$31.0 million letter of credit facility. The sukuk proceeds, together with RM61.3 million in equity contribution, will translate to a finance-to-equity ratio of 80:20, which is typical of MARC-rated project financing structures.

SKSB will supply solar power for a period of 21 years to Tenaga Nasional Berhad (TNB) under a solar power purchase agreement (SPPA) at a fixed tariff. MARC’s rating on the sukuk primarily reflects the adequate projected cash flow coverage on the back of the energy payments from the offtaker TNB (AAA/Stable). The rating is also supported by the well-structured contract arrangements with respect to the engineering, procurement and construction (EPC) as well as operations and maintenance (O&M) of the solar power plant project. Moderating the rating are risks associated with project completion, solar irradiance estimates and overall plant performance.

Entrutech Sdn Bhd (Entrutech), an indirect wholly-owned subsidiary of Mudajaya, has been awarded the prime EPC contract. Entrutech in turn has awarded the supply subcontract to China-based Sumec Complete Equipment & Engineering Co Ltd (Sumec) and the construction subcontract to Rising Energy Technology Sdn Bhd (Rising Energy) in which Sumec has a 50% interest. MARC notes that the prime EPC contract generally mirrors the two subcontracts such that the key obligations of Sumec, Rising Energy and Entrutech are back-to-back. All three contracts are fixed sum and date certain, aimed at achieving commercial operation date (COD) by August 31, 2018.

MARC views the experience and credit strength of Sumec as sufficient to undertake construction of the solar power project. In the event of delay, the liquidated damages (LD) provisions under the EPC contracts and the procurement of insurance coverages should address compensation payable to TNB and potential cash flow mismatches. MARC further notes that Sumec will assume all liabilities in the event Rising Energy fails to discharge its duties or obligations as prescribed. As key equipment including solar panels and string inverters are sourced from reputable suppliers namely JA Solar Holdings Co Ltd and Huawei Technologies Co Ltd, supplier risk is mitigated.

Mudajaya Industries Sdn Bhd (MISB), an indirect wholly-owned subsidiary of Mudajaya, will undertake the O&M of the solar power plant. MARC views that the performance guarantee provisions in the 21-year O&M agreement (OMA) between MISB and SKSB mitigate O&M risks. SKSB is also covered by equipment warranties that are in line with acceptable industry standards. A maintenance reserve amounting to RM10.0 million will be built up over 10 years starting from year one after the COD to cover contingencies for major maintenance works including the replacement of solar panels and inverters. Any withdrawals from the reserves will be replenished over a period of three years from the date of withdrawals.

The rating case projections incorporate P90 energy production levels using high quality satellite data with adjustments made to the modelling of data uncertainties and inter-annual variabilities as advised by the independent consulting engineer (ICE). Other key assumptions include annual escalations of 3.5% in O&M fees and panel degradation of 0.7% per annum. Based on the P90 resource probability scenario, the project is expected to have minimum and average finance service cover ratios (FSCR) with cash of 2.32 times and 2.66 times respectively throughout the sukuk tenure. Project debt coverage is deemed satisfactory under MARC’s moderate stress scenarios which include a lower plant performance ratio, three-month delay in project completion or 20% increase in operating expenses.

MARC also derives comfort from the fact that the project’s average FSCR with cash under the P99 resource probability scenario is satisfactory at 2.47 times. If project cost overrun is stressed at 10%, the minimum and average FSCR with cash would be 1.48 times (2019) and 1.75 times respectively. Cost overrun will also be partly mitigated by a bank guarantee of up to RM6.5 million as well as the project sponsor’s undertaking to fund additional project cost. MARC notes the minimum FSCR levels for most of the stressed cases are projected to occur in 2035 which is largely due to the higher sukuk repayment in 2036. As such, MARC expects prudence in SKSB’s liquidity management and shareholders’ distributions, particularly in 2035, to meet the minimum required financial covenants under the sukuk structure.

The stable outlook reflects MARC’s expectation that the project will achieve COD within the allocated budget and the project sponsor will adhere to capital commitments and obligations under the financing structure. Upon successful commencement of operations, the rating may be revised upwards if the project manages to achieve energy output exceeding the projected estimates, resulting in a stronger average FSCR with cash.

Major Rating Factors

Strengths

• Tariff structure supportive of project economics; and
• Satisfactory project debt coverages.

Challenges/Risks

• Potential project completion delays and cost overruns; and
• Variability of solar resource.