QUANTUM SOLAR PARK (SEMENANJUNG) SDN BHD - 2019

MARC has downgraded Quantum Solar Park (Semenanjung) Sdn Bhd’s (QSP Semenanjung) RM1.0 billion Green SRI Sukuk rating to A+_IS from AA-_IS/Negative and concurrently placed the rating on MARCWatch Negative.

The rating action reflects the heightened risk of termination of solar power purchase agreements (SPPAs) related to QSP Semenanjung’s Merchang and Jasin solar power plant projects following the unlikely event of achieving commercial operation date (COD) at these plants by the walkaway event date of January 27, 2019. Construction progress stood at 62.3% for the Merchang plant and 68.1% for the Jasin plant as at September 28, 2018 according to the independent consultant engineer’s report. Its other plant in Gurun achieved COD on December 19, 2018.

The SPPAs were signed with Tenaga Nasional Berhad (TNB) which can terminate the agreements on failure to achieve COD within the specified 180-day period from the scheduled COD on July 31, 2018. The rating agency notes that QSP Semenanjung’s new revised CODs for both the Merchang and Jasin plants of March 26, 2019 and March 22, 2019 are beyond the 180-day period from the scheduled COD under the SPPAs. The company has now requested for an extension of time (EOT) from the Energy Commission (EC) to complete the plants by April 30, 2019 which, MARC understands, is being considered. Given the completion of the Gurun plant and the advanced construction stage for the Merchang and Jasin plants, MARC views that the EC would likely take these factors into account in its consideration for granting an EOT.

Completion delay of the plants has also weakened the overall project cash flows and strained QSP Semenanjung’s liquidity position in 2019 and 2020, necessitating the issuer to undertake proposed enhancements to the sukuk structure. These include a top up to the finance service reserve account prefund 1.5 years of principal and profit payments (sukuk payments). Funds for the top up will be from the proposed deferment of payments to its engineering, procurement and construction contractor (EPC) Scatec Solar Solutions Malaysia Sdn Bhd (Scatec Malaysia) until the sukuk payments in April 2020. Any payment to Scatec Malaysia is further subject to QSP Semenanjung adhering to a minimum finance service cover ratio of 1.50x post payment subject to certain conditions. A related company to EPC, Scatec Solar Malaysia B.V., is a preference shareholder of QSP Semenanjung.

MARC highlights that there could be a multi-notch downgrade if QSP Semenanjung fails to obtain the sukukholders’ waiver to the event of default (EOD), or the construction at the two plants do not show significant progress or the EC exercises the walkaway clause. MARC will closely monitor QSP Semenanjung’s progress and will seek to resolve the MARCWatch Negative placement within the next 90 days.

Major Rating Factors

Strengths

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

Challenges/Risks

• Heightened termination risk of solar power purchase agreements; and
• Weakened fundamental project cash flow due to completion delays.