MALAKOFF POWER BERHAD - 2017

MARC has affirmed its AA-_IS rating on Malakoff Power Berhad’s (MPower) RM5.4 billion Sukuk Murabahah with a stable outlook. MPower is the operations and maintenance (O&M) operator of its parent company Malakoff Corporation Berhad’s (Malakoff) majority-owned domestic power plants. The rating affirmation considers the consolidated credit strength of MPower and Malakoff, taking into account the significant operational and financial linkages between the two entities, underpinned by the entities’ common dependency on the performance of its power plant portfolio and the Kafalah guarantee provided by Malakoff in favour of the sukukholders. Revenue earned by MPower under O&M contracts with the aforementioned power plants and cash flows from preference shares and loan stock holdings issued by power generating subsidiaries of Malakoff constitute the main repayment sources for the rated sukuk, as well as inter-company advances/repayments by its parent company.

The rating is supported by the stability and moderately high predictability of revenue and cash flows available for the servicing of the sukuk. The rating further reflects the overall adequate operating performance of Malakoff’s power plant portfolio, which is subject to long-term power purchase agreements (PPA) with a high credit quality offtaker, Tenaga Nasional Berhad (AAA/Stable). Constraining the rating is Malakoff’s high leverage position and the group’s high reliance on residual cash flows from its key subsidiaries, Tanjung Bin Power Sdn Bhd (TBP) and Segari Energy Ventures Sdn Bhd (SEV). In 2017, Malakoff’s domestic power plants performed within MARC’s expectations except Tanjung Bin Energy Sdn Bhd (TBE) which saw a reduction in its available capacity payments (ACP) due to unplanned outages. Meanwhile, TBP received full ACP and full fuel cost pass-through in the corresponding period.

In 2017, Malakoff group’s revenue grew 16.9% on the back of higher energy revenue. However, the group’s pre-tax profit was lower at RM588.5 million mainly due to the step-down in SEV’s capacity revenue and unscheduled plant outages of TBE. The additional cash flow from TBP arising from higher other income coupled with lower investment outlays boosted Malakoff group’s free cashflow to RM2.1 billion in 2017 (2016: RM1.6 billion). As a result, the group recorded a higher cash balance of RM5.0 billion in 2017 (2016: RM4.4 billion). Meanwhile, its consolidated debt-to-equity (DE) ratio improved to 2.29 times against lower total outstanding debt of RM15.8 billion. This is mainly attributed to the successful refinancing of TBE Issuer Berhad’s RM1.3 billion equity bridge loan (EBL) on March 15, 2017 with proceeds from the issuance of RM800 million perpetual sukuk and RM500 million cash injection from Malakoff.

In 2017, MPower’s loan stock income from TBP was RM88.1 million while SEV contributed RM188.7 million. Notwithstanding the lower capacity payments received following its revised PPA commencing on July 1, 2017, MPower will be relying on SEV to provide considerable cash flow through its holdings of SEV’s preference shares which were successfully converted from its loan stocks in January 2018. Similarly, MPower will also be dependent on its holdings of TBP’s preference shares and loan stocks as TBP’s residual cash flow after senior debt servicing will be reduced with the commencement of repayments on senior debt and the corresponding step-down in its capacity rate financial (CRF) in 2H2019. MARC believes that Malakoff and MPower would need to conserve liquidity ahead of 2019’s scheduled debt repayment of RM670 million.

The stable outlook incorporates MARC’s expectations that Malakoff’s power generating subsidiaries will continue to deliver satisfactory operational and financial performances to support the group’s debt obligations. Downward pressure on the rating may emerge if Malakoff’s consolidated DE ratio deviates significantly from the rating agency’s expectations and/or the group’s liquidity position deteriorates sharply as a result of significant outage or performance failure at one or more of its power plants.

Major Rating Factors

Strengths

• Predictable cash flow generation from moderately diversified repayment sources;
• Strong operational track record of Malakoff group; and
• Sound covenants to ensure adequate liquidity coverage.

Challenges/Risks

• High reliance on cash flows from two key subsidiaries;
• Malakoff group’s low equity base.