MARC has affirmed its AA-_IS rating on Malakoff Power Berhad’s (MPower) RM5.40 billion Sukuk Murabahah with a stable outlook. The rating affects the outstanding sukuk of RM4.44 billion.

Wholly-owned by Malakoff Corporation Berhad (Malakoff), MPower is the operations and maintenance (O&M) service provider of its parent’s domestic power generation facilities. The rating reflects the consolidated credit strength of Malakoff and MPower arising from the significant financial linkages between them and the explicit Kafalah guarantee provided by Malakoff in favour of the sukukholders. The group’s credit strength is derived from Malakoff’s position as the largest domestic independent power producer (IPP) with a gross generating capacity of 7,249MW in Malaysia and its low business risk profile stemming primarily from fairly predictable cash flows from its portfolio of power plants under long-term power purchasing agreements (PPA) with Tenaga Nasional Berhad (rated AAA/Stable).

MPower operates four independent gas-fired plants, of which the largest plant is held by Segari Energy Ventures Sdn Bhd (SEV); and one coal-fired plant held by Tanjung Bin Power Sdn Bhd (TBP). MPower will also be undertaking the O&M operations of a coal-fired power plant project which is under construction by Tanjung Bin Energy Sdn Bhd (TBE). MPower’s O&M revenue and the cash flows generated by the power generating subsidiaries, by way of dividend and repayments on loan stocks issued by them, form the main repayment source for the sukuk. As at June 30, 2015, the outstanding loan stock was RM2.2 billion. Moderating the rating is the significant reliance on the cash flow generated by TBP and SEV to meet the rated sukuk obligations, the completion risks on TBE as well as the refinancing risk on TBE’s RM1.3 billion equity bridging loan (EBL) due in March 2017. The proceeds from the EBL were used to finance Malakoff’s equity portion of TBE’s power plant project.

For 2015, MPower’s loan stock income from TBP of RM274.8 million and SEV of RM262.7 million were broadly in line with MARC’s expectations and remains supportive of the finance service obligations during the corresponding period. SEV will continue to provide substantial cash flow to MPower via its RM1.2 billion outstanding loan stocks as of June 30, 2015, with the final repayment falling due in 2027. TBP will remain a major contributor to the group until the amortisation of its project debt commences in 2019, following which cash flows from TBE will be crucial to offset the lower contribution from TBP. In this regard, MARC notes TBE’s construction progress reached 99.26% as at end-2015 against scheduled progress of 99.65%, narrowing the progress variance substantially through increased manpower and working hours to expedite construction progress. TBE is scheduled to achieve commercial operations on 1 March 2016.

TBE has received a waiver on a significant portion of the existing claims from the engineering, procurement and construction (EPC) contractor, alleviating MARC’s earlier concerns on the risk of significant cost overruns. Further mitigating the cost overrun risk is TBE’s project savings from financing and soft costs amounting to RM130.3 million as well as the adequate construction-related insurance coverage.

The consolidated entity’s high debt leverage of 4.36 times as at end-December 2014 has been reduced to 2.88 times as at end-June 2015 following the early redemption of the unrated RM1.8 billion Junior Sukuk from the net proceeds from Malakoff’s relisting exercise in May 2015. The redemption would enable Malakoff to achieve better earnings through interest savings of up to RM167.4 million per annum on the Junior Sukuk. Malakoff’s consolidated retained earnings turned positive to RM61.2 million as at June 30, 2015 (December 31, 2014: negative RM29.0 million). MARC notes that the minimal finance service obligations on the rated sukuk in 2016 and 2017 should provide Malakoff some financial headroom for the refinancing of TBE’s EBL. The rating agency also expects the group to maintain its financial position by preserving its cash buffer, particularly in 2019 when the principal repayment is the highest.

The stable outlook incorporates the rating team’s expectations that Malakoff’s main contributing subsidiaries will maintain satisfactory operating and financial performances that are supportive of the group’s finance service obligations. The outlook also assumes that TBE will achieve commercial operations within six months from the scheduled commercial operations date and the refinancing risk of EBL will be adequately addressed well before 2017.

Contacts:
Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.