CREDIT ANALYSIS REPORT

SPARKS ENERGY 1 SDN BHD

Report ID 605287 Popularity 184 views 24 downloads 
Report Date Oct 2020 Product  
Company / Issuer Sparks Energy 1 Sdn Bhd Sector Infrastructure & Utilities
Price (RM)
Normal: RM500.00        
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Rationale
MARC has assigned a preliminary rating of AA-IS to Sparks Energy 1 Sdn Bhd’s (Sparks Energy 1) proposed ASEAN Green Sustainable and Responsible Investment (SRI) Sukuk Murabahah of up to RM220.0 million. The rating outlook is stable.

Sparks Energy 1 is a special purpose vehicle incorporated to raise funding to develop a 30MWac solar power plant (SPP) in Kuala Muda, Kedah and another in Machang, Kelantan. The power plants are being developed by BGMC BRAS Power Sdn Bhd (BBPSB) and Idiwan Solar Sdn Bhd (ISSB) under solar power purchase agreements (PPA) with Tenaga Nasional Berhad (TNB) (AAA/ Stable). 

The assigned rating is driven by Sparks Energy 1’s projected adequate cash flow coverage on the back of the 21-year fixed tariff PPAs with TNB. The rating also considers the project’s strong finance-to-equity ratio of 53:47 and the fixed lumpsum engineering, procurement, construction and commissioning (EPCC) contract that transfers the risk of any cost overrun to the EPCC contractor. Moderating the rating are risks associated with project completion and variability of solar resource.

The total cost for both projects is RM411.7 million. Proceeds from the proposed sukuk will be utilised to subscribe to unrated sukuk to be issued by BBPSP and ISSB; however, the equity of RM191.7 million, mainly consisting of redeemable preference shares (RPS) amounting to RM191.5 million, will be fully utilised before the issuance of the sukuk. 

The fixed-sum EPCC contract has been awarded to a consortium comprising China-based China Machinery Engineering Corporation (CMEC) and its subsidiaries, and domestic construction company, Mattan Engineering Sdn Bhd (CMEC-Mattan consortium). The consortium members have undertaken and completed the construction of a 50MW solar power project in Negeri Sembilan and a 29MW power plant in Johor. Construction of the solar power plants has been delayed by the movement restrictions imposed in the wake of the COVID-19 pandemic; as at end-July 2020, the Kuala Muda and Machang plants recorded actual progress of 48% and 42% against the scheduled 92% and 94%. As the movement restrictions led to a suspension of work for 84 days, both project companies have sent a force majeure notice to TNB on March 18, 2020 and revised the commercial operation date (COD) to December 13, 2020 (Kuala Muda SPP) and January 17, 2021 (Machang SPP). 

MARC understands that the EPCC contractor, CMEC-Mattan consortium has taken steps to accelerate the construction works, including by having work done during weekends. Notwithstanding the revised CODs and the accelerated works, progress could be affected by seasonal monsoon weather while the different terrain at the two locations could pose some challenges in terms of asset mobilisation. Cost overrun risk is mitigated by the fixed-price turnkey contract with CMEC-Mattan consortium.

Upon commencing commercial operation, the project companies would receive stable cash flows under the PPA terms. CMEC-Mattan consortium will operate the plants under a 3-year operations and maintenance (O&M) contract with an option for yearly extension. O&M risk is mitigated by performance guarantee provisions under the O&M and EPCC contracts, as well as equipment guarantee from suppliers. The cash flow projections’ base case assumes COD of both plants on February 1, 2021 and P90 energy production levels; in this scenario, the projected cash flow is expected to have minimum and average finance service cover ratios (FSCR) with cash of 1.91x and 2.24x throughout the sukuk tenure. The cash flow projections can withstand moderate sensitivity scenarios which include an additional six-month delay in project completion, 10% increase in O&M cost and higher plant outage. Mitigating potential debt service shortfalls is the requirement to maintain a minimum balance in the finance service reserve account (FSRA) of the next six months’ profit payment and the next 12 months’ principal repayment due. 

The stable outlook reflects MARC’s expectation that the projects will be granted an extension of time by TNB for the force majeure and the construction work will be completed within the allocated budget. 

Major Rating Factors

Strengths
  • Demand risk mitigated by power purchase agreement (PPA) terms; and
  • Higher proportion of equity in financing relative to other solar power projects.
Challenges/Risks
  • Project completion delays; and 
  • Variability of solar resource. 

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