MARC has affirmed its AA-IS rating on Malakoff Power Berhad’s (MPower) RM5.38 billion Sukuk Murabahah. The outlook on the rating is stable.

MPower undertakes the operations and maintenance (O&M) of several independent power producers (IPP) of its parent, Malakoff Corporation Berhad (Malakoff), an investment holding company with 7,249.4 megawatts (MW) of gross power generating capacity in Malaysia as well as 2,249.0MW and 1,640,000 cubic metres per day (m3/day) of gross power and water production capacities overseas. The affirmed rating and outlook on the sukuk reflect the consolidated credit strength of Malakoff and its wholly-owned subsidiary MPower due to the strong credit linkages between the parent and subsidiary and the explicit Kafalah guarantee provided by Malakoff in favour of the sukukholders. Underpinning the group’s credit quality is the predictable cash flow generation from its portfolio of power and water assets which operate under long-term concessions expiring between 2016 and 2041. The rating also incorporates the group’s low business risk profile, moderate exposure to demand risk and sound operating track record of Malakoff as a leading developer of IPPs in Malaysia.

MPower currently operates four independent gas-fired plants held by Segari Energy Ventures Sdn Bhd (SEV), GB3 Sdn Bhd (GB3), Prai Power Sdn Bhd (PPSB) and Port Dickson Power Berhad (PDP) and one independent coal-fired power plant held by Tanjung Bin Power Sdn Bhd (TBP). These IPPs have a combined total generating capacity of 4,829.4MW.  In addition, the O&M operations of the 1,000MW coal-fired power plant project being developed by Malakoff’s wholly-owned subsidiary Tanjung Bin Energy Sdn Bhd (TBE) will be undertaken by MPower. The predictable cash flows generated by the five IPPs under long-term power purchase agreements with Tenaga Nasional Berhad, which carries a MARC rating of AAA/Stable, provide the main source for the repayment of the sukuk by way of dividends and repayments on the RM2.8 billion loan stocks outstanding as at June 30, 2014 issued by SEV, TBP, PPSB and GB3.

For 2013, TBP and SEV generated free cash flow before dividends of RM749.9 million and RM357.5 million respectively (2012: RM997.4 million; RM444.7 million) which were in line with MARC’s expectations and remain supportive of MPower and Malakoff’s finance service obligations. MARC expects TBP’s contribution to increase in the near term following the plant’s normalised operations since March 2014 after the completion of major boiler improvement works. For 2013, the total dividend upstreamed by TBP and SEV accounted for a significant 66.7% of Malakoff’s revenue (2012: 64.7%).

MARC also notes the group’s high consolidated debt leverage, owing to its debt-funded growth strategy and low equity base, remains a negative rating factor. While the rating agency acknowledges the consolidated entity’s improved financial flexibility following MPower’s debt refinancing exercise in December 2013, it believes that the timely completion of Malakoff’s initial public offering (IPO) expected in 2015 would be a major step to address the group’s leverage metrics, and at the same time provide funding for any expansion/acquisitions.

Malakoff’s recent major acquisitions include a 50% interest in the 420MW Macarthur Wind Farm in Australia for AU$130 million and the remaining 75% interest in the 436.4MW Port Dickson Power Station in Negeri Sembilan not owned by Malakoff together with the plant’s O&M company for RM300 million. The acquisitions resulted in an expansion of the group’s consolidated borrowings to RM18.4 billion as at June 30, 2014 (December 31, 2013: RM17.5 billion; 2012: RM15.3 billion) and debt-to-equity (DE) ratio to 4.42 times (x) (December 31, 2013: 4.19x; 2012: 3.67x) or 2.92x as at end-2013 if calculated based on the definition provided under the sukuk terms. Without the IPO proceeds, the borrowings would strain Malakoff’s financial capacity to address its significant refinancing risks in 2017, which mainly relate to a partially drawn equity bridging loan of RM1.3 billion to TBE.

MARC is also concerned on the construction progress of and variation order claims on the TBE plant. As at October 25, 2014, the actual physical completion stood at 78.65% against scheduled completion of 87.67%, mainly due to unfavourable subsoil conditions which led to delays in civil works. To expedite the construction progress, MARC understands that a mitigating plan has been put in place, including extending working hours with increased manpower and resources. MARC notes that several variation order claims were made by the engineering, procurement and construction (EPC) contractor, although management has highlighted that they are mostly unsubstantiated. TBE’s project contingency budget may be utilised for any project cost overruns up to RM118 million.

The stable outlook reflects MARC’s expectations that (1) Malakoff’s main contributing subsidiaries will continue to deliver satisfactory operating and financial performances; (2) TBE will commence commercial operations within 180 days from its original scheduled commercial operations date of March 1, 2016 and potential cost overruns will remain largely within the available contingency buffer; (3) Malakoff will exercise a more disciplined approach in managing the group’s leverage over the next 18 months; and (4) the anticipated refinancing risks will be properly addressed before 2017. MARC will continue to closely monitor TBE’s construction progress and will take the necessary rating action if an adverse cost overrun liability arises without any mitigating developments.

Contacts:
Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.