MARC has affirmed the ratings on Ranhill Powertron II Sdn Bhd’s (RPII) RM350.0 million guaranteed notes and RM360.0 million non-guaranteed notes issued under its RM710 million nominal value Islamic Medium Term Notes (IMTN) Programme at AAAIS(fg) and AAIS respectively. The outlook for both ratings is stable.

The affirmed rating and stable outlook on the guaranteed notes reflect the credit strength of an unconditional and irrevocable guarantee provided by Danajamin Nasional Berhad (Danajamin) which MARC currently rates AAA/Stable. Danajamin’s rating reflects its important role as Malaysia’s sole financial guarantee insurer, its status as a government-sponsored entity, its solid capital base and ample liquidity.

The affirmed rating on the non-guaranteed notes reflects the overall sound operating performance of the 190-megawatt Rugading power project (the project) and satisfactory finance service coverage for the 18 months ending December 31, 2011 (18M2011). The rating takes into account the sound credit quality of Sabah Electricity Sdn Bhd (SESB), its sole offtaker, and also considers the strategic importance of the project to SESB in terms of the state’s energy requirements, the adequacy of the project’s natural gas supply arrangements and the transfer of fuel price risk to the offtaker. The strength of RPII’s covenant package, such as the minimum finance service cover ratio (FSCR) requirement of 1.25 times (x) and maximum debt-to-equity (DE) ratio of 80:20, are also supportive of the rating.

The stable rating outlook on the non-guaranteed notes reflects MARC’s expectations that the current sound operating performance of the project will continue. Under this scenario, the project cash flows are expected to provide a strong covenant cushion relative to its minimum covenant level of FSCR. MARC believes that the strength in this credit metric offers some protection against declines in forecast plant availability.

RPII's non-guaranteed notes are secured by a pledge of revenues from the operation of the project under a 21-year take-or-pay power purchase agreement (PPA) with SESB on a pari-passu basis with the guarantee provider, Danajamin. The project has been operated principally in a combined cycle mode since April 2011 and has continued to meet prescribed performance standards for its combined cycle operations under the PPA, allowing RPII to receive full capacity payments (CPs) and attain full pass-through of fuel costs. However, both actual CPs and energy payments (EPs) for 18M2011 were lower compared to earlier financial projections by RM5.0 million and RM12.3 million respectively. The lower-than-forecast CPs and EPs were due to a one-month delay in the combined cycle commercial operation date (COD) of the project and lower dispatch demand from SESB, respectively. MARC believes the operational risks of the project are sufficiently mitigated by the plant’s commercially proven technology, gas turbine contractual maintenance arrangements, the adequate performance incentives given to the project’s operation and maintenance operator, Ranhill Power II O&M Sdn Bhd, and the plant’s experienced operating team.

RPII posted a largely anticipated pre-tax loss of RM8.4 million for 18M2011 as a result of the RM13.5 million liquidated damages provision made in connection with the project’s failure to achieve its combined cycle COD by September 1, 2010 as originally agreed upon in the PPA. RPII will make payment of the liquidated damages to SESB in instalments beginning 2012 through 2018, which would lessen the pressure on operating cash flows (CFO). Lower-than-projected net cash flow of RM60.9 million (projected: RM70.2 million) arose mostly from lower-than-forecast CPs and EPs and additional term loan interest costs incurred on account of the delayed financial close on the refinancing of its term loan. The negative impact of the revenue shortfalls and additional interest costs on RPII’s FSCR was moderated to a large extent by the company’s arrangement with SESB to make payment of the aforementioned liquidated damages over an extended period of time; the base case projections had assumed a single payment of RM13.5 million during 18M2011. RPII’s actual FSCR for 18M2011 of 4.06x was within expectations. RPII maintained compliance with its 80:20 leverage covenant as at end-December 2011 with a DE ratio of 75:25.

Under RPII’s updated financial projections, the project’s FSCR (including cash balances) averages 5.48x with a minimum of 4.07x during the remaining tenure of the IMTN programme. The rating on the non-guaranteed notes would come under pressure if the project's performance measures are not met and SESB reduces its CPs. A decline in the creditworthiness of the offtaker, an 80% subsidiary of Tenaga Nasional Berhad (TNB), would also exert pressure on the rating of the non-guaranteed notes. (MARC currently maintains a senior unsecured debt rating of AAA/Stable on TNB.)

The non-guaranteed notes will be fully amortised by June 2022, prior to the step-down in its capacity payment rates from RM36.50 per kilowatt (kW) per month to RM23.80 per kW per month from 2023 onwards. MARC anticipates that CFO will decline to a level that will make RPII reliant on the retention of excess cash flow from prior years to maintain its FSCR on the Danajamin guaranteed notes at 1.00x. Furthermore, the rating agency believes that the decline in CPs will increase RPII’s susceptibility to deterioration in the project’s operating performance and dividend distributions could further weaken liquidity. MARC expects the exposure of the guaranteed notes to any deterioration in RPII’s credit profile to be fully mitigated by the irrevocable guarantee provided by Danajamin. Any change in the rating on the guaranteed notes will be primarily driven by a change in the financial guarantee insurer’s credit strength.

Contacts:
Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;
Jason Kok Ching Wui, +603-2082 2258/ jason@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.