SPARKS ENERGY 1 SDN BHD - 2021 |
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| Report ID | 60538900428 | Popularity | 637 views 40 downloads | |||||
| Report Date | Dec 2021 | Product | ||||||
| Company / Issuer | Sparks Energy 1 Sdn Bhd | Sector | Infrastructure & Utilities | |||||
| Price (RM) |
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| Rationale |
Rating action MARC has affirmed its preliminary AA-IS rating on Sparks Energy 1 Sdn Bhd’s proposed ASEAN Green Sustainable and Responsible Investment (SRI) Sukuk Murabahah of up to RM220.0 million. The rating outlook is stable. Rationale Sparks Energy 1 is a special purpose vehicle incorporated to raise funding to develop two 30MWac solar power plants (SPP) in Kuala Muda, Kedah and Machang, Kelantan. The rated sukuk will be issued upon achievement of the commercial operation dates (COD) for both plants; proceeds will be used to repay the outstanding bridging loan of RM220.0 million from OCBC Bank Malaysia Berhad, which was utilised for the subscription of unrated sukuk issued by BGMC BRAS Power Sdn Bhd (BBPSB) and Idiwan Solar Sdn Bhd (ISSB) to fund plant construction. In light of these factors, the rating only considers the operational phase of the project. The affirmed rating is driven by Sparks Energy 1’s projected adequate cash flow coverage on the back of its project companies BBPSB’s and ISSB’s 21-year solar power purchase agreements (SPPA) with Tenaga Nasional Berhad (TNB) (rated AAA/Stable). The rating also considers the project’s strong finance-to equity (FER) ratio of 53:47. Moderating the rating are risks associated with variability of solar resource. Construction of the plants has been delayed by logistical issues as a result of movement restrictions in the country due to the COVID-19 pandemic as well as unfavourable weather conditions. Construction is currently being undertaken beyond the walkaway event dates of September 18 (Kuala Muda) and October 16 (Machang); these dates were extensions from the original walkaway dates in mid-June 2021 as approved by the Energy Commission (EC). MARC views termination risk to be low, given the impending completion of both plants. As at end-August 2021, the Kuala Muda and Machang plants recorded actual progress of 99% and 87%. The projects are expected to be completed by December 31, 2021 (Kuala Muda) and January 31, 2022 (Machang), with further walkaway event date extensions applied up to end-February 2022 and end-April 2022. This includes an additional two to three months’ buffer for the commissioning stage. The total project cost for both projects remain within the projected RM411.7 million. Cost overrun risk arising from accelerated works undertaken to recover project progress delays is mitigated by the fixed-price turnkey contract with a consortium consisting of China-based China Machinery Engineering Corporation (CMEC) and Mattan Engineering Sdn Bhd (CMEC-Mattan Consortium), and a contingency sum of RM13.3 million. 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 three-year operations and maintenance (O&M) contract with the option for yearly extensions. O&M risk is mitigated by performance guarantee provisions under both engineering, procurement, construction and commissioning (EPCC) and O&M contracts, as well as equipment guarantee from suppliers. Our base case cash flow projections assume the COD of both plants on February 1, 2022 and P90 energy production levels; in this scenario, the projected cash flow is expected to have minimum and average finance service cover ratios (FSCR) of 1.91x and 2.24x throughout the sukuk tenure. The cash flow projections can withstand the combined stress scenario of P99 energy production levels, O&M cost increase of 10% and plant outage increase of 3%. The stable outlook reflects our expectation that the projects will be granted further walkaway date extensions by the EC to mitigate termination risk, while construction work will be completed within the budgeted cost. In the event that the walkaway dates are not extended and the PPA is terminated, sukukholders will not be affected given that the sukuk will only be issued after COD of the power plants. Key strengths • Demand risk mitigated by the terms in the power purchase agreements • Higher proportion of equity in financing relative to other solar power projects • Sukuk only issued after projects achieve commercial operation dates Key risks • Variability of solar resource • Plants’ operational risk |
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