QUANTUM SOLAR PARK (SEMENANJUNG) SDN BHD - 2018

MARC has affirmed its AA-_IS rating on Quantum Solar Park (Semenanjung) Sdn Bhd’s (QSP Semenanjung) RM1.0 billion Green SRI Sukuk. The rating outlook has been revised to negative from stable.

The negative outlook reflects primarily the heightened termination risk of two of the three solar power purchase agreements (SPPA) following delays in achieving commercial operation dates (COD) of QSP Semenanjung’s solar photovoltaic power plants, each with a capacity of 50MWac. The delays on the actual completion of the plants could also lead to a weakening of the cash flow buffer in meeting financing obligations.

The negative outlook would be revised to stable if the plants achieve COD before the relevant walkaway dates with no major hitches upon completion and if projected cash flows at that juncture show robustness in meeting financing obligations.

QSP Semenanjung’s solar power plants (SPP) were granted a second and final extension to achieve their respective scheduled commercial operation date (SCOD) with the revised dates being June 30, 2018 for the Gurun plant and July 31, 2018 for the Merchang and Jasin plants. However, construction progress of the Gurun, Merchang and Jasin plants has been slower than expected, recording 84.7%, 52.5% and 57.0% completion as at July 31, 2018 according to an independent third-party expert. According to the company, the Gurun plant has now achieved initial operation date (IOD) (pending confirmation by Tenaga Nasional Berhad (TNB)) and, barring any unforeseen circumstance, is expected to achieve COD by end-October 2018.

Nonetheless, the termination risk of the SPPA related to the Merchang and Jasin plants remains a concern. Should the plants not achieve COD within 180 days from the extended SCOD (Gurun: December 31, 2018; Jasin and Merchang: January 31, 2019), the agreements may be terminated. To mitigate this risk, QSP Semenanjung has accelerated overall construction activities to achieve COD before the walkaway period for the plants.

Meanwhile, the affirmed rating is underpinned by the commitment from project sponsors who have fully injected their remaining balance of equity portion amounting to RM180.0 million in July 2018, bringing the total equity to RM250.8 million in line with the 80:20 sukuk-to-equity financing mix. MARC also draws comfort from the letter of undertaking (LOU) provided by engineering, procurement and construction contractor Scatec Solar Solutions Malaysia Sdn Bhd (Scatec Malaysia) to defer receipt of the final milestone payment of RM52.1 million.

The deferment would address the liquidity shortfall over the near term in meeting the minimum required balance in the finance service reserve account (FSRA) in April 2019 in respect of principal and profit payment obligations in October 2019. The deferment is up to 12 months from the last COD achieved by the plants. MARC has also taken into account the contingency bank guarantee as a liquidity buffer for the time being as the bank guarantee’s validity expires on the earlier of December 31, 2018 or COD of the three plants. However, the contingency bank guarantee can be renewed 30 business days prior to its expiry if the COD for the plants have not been achieved.

Post-COD, the project companies will receive stable cash flow streams under the terms of the SPPA. The operations and maintenance (O&M) risk is mitigated by performance guarantee provisions under the 18-year O&M agreements (OMA) with O&M operator Scatec Malaysia. Additionally, a maintenance reserve fund will be progressively built up to RM12.0 million within the first 10 years of operations to serve as a contingency for any maintenance requirements. QSP Semenanjung’s cash flows are also expected to be supported by the receipt of goods and services tax (GST) input refunds amounting to RM57.6 million, although the timing of the GST refunds remains uncertain.

Major Rating Factors

Strengths

• Tariff structure that is supportive of project cash flows; and
• Low operational risk post-COD.

Challenges/Risks

• Weakened cash flow buffer on non-timely receipt of GST funds; and
• Termination risk of solar power purchase agreements.