Tuesday, Mar 20, 2018
MARC has assigned a preliminary rating of AA-IS to UiTM Solar Power Sdn Bhd’s (UiTM Solar) proposed Green SRI Sukuk of up to RM240.0 million. The outlook on the rating is stable.
UiTM Solar is 98% owned by UiTM Energy & Facilities Sdn Bhd (UiTM Energy), a wholly-owned subsidiary of UiTM Holdings Sdn Bhd (UHSB) which in turn is wholly owned by Universiti Teknologi Mara (UiTM), a higher learning institution under the purview of the Ministry of Higher Education. Perwira Al-Shura Sdn Bhd (PACE), the project owner’s engineer and BJ Power Co Ltd (BJ Power), the technical partner for the project each hold one percent in UITM Solar.
UiTM Solar is a project company set up to develop and operate a greenfield solar power plant (SPP) with a capacity of 50.0MWac in Gambang, Pahang at an estimated total project cost of RM277.9 million funded at a finance-to-equity (FE) ratio of 80:20. The equity portion comprises ordinary shares and redeemable cumulative convertible preference shares (RCPS). Both shareholders’ funds and RCPS will be injected prior to the issuance of the proposed sukuk.
The preliminary rating reflects the (1) adequate cash flow coverage under the rating case projections on the back of the 21-year fixed tariff solar power purchase agreement (SPPA) with Tenaga Nasional Bhd (TNB) (AAA/Stable); (2) well-structured contracts with regard to the engineering, procurement and construction (EPC) and operations and maintenance (O&M); and (3) project finance structure which is commensurate with the rating band. The rating is mainly constrained by risks associated with project completion and uncertainties inherent in estimating solar resource and plant performance.
Construction will be completed via a fixed-priced date-certain EPC contracts. MARC views the contractors, Northwest Electric Power Design Institute Co Ltd (NWEPDI) and ET Energy (M) Sdn Bhd (ETEM), to have the requisite experience and financial resources to meet the provisions of the contracts and achieve commercial operations date (COD) by November 1, 2018.
Project completion delays and cost overrun risks are adequately addressed. Liquidated damages (LD) provided for under the EPC contracts and the procurement of insurance coverage for delays should mitigate compensation payable to TNB and potential cash flow mismatches. The project has a built-in 4.0% contingency buffer amounting to RM11.2 million. In addition, construction cost overruns are further mitigated by a bank guarantee of RM7.0 million. The total contingency sum of about 6.5% of total project cost is deemed sufficient to cover potential cost overruns. Key equipment risks including solar panels and inverters are mitigated given the proven technology and reputable manufacturers, Jinko Solar Holdings Co Ltd and Sungrow Power Supply Co Ltd.
MARC views operation risk to be limited given the relatively simple nature of the processes in SPPs which have no moving parts. The O&M agreement is executed with ETEM and has a tenure of five years plus two consecutive options to renew for two years. Warranties are provided for plant performance and availability with sufficient LD provisions to compensate UiTM Solar including for non-delivery penalties under the SPPA. These LDs are secured by a bank-guaranteed performance bond amounting to 15.0% of the O&M contract sum.
The rating case projections incorporate P90 energy production levels using high quality satellite data with adjustments made to the modelling of data uncertainties and inter-annual variabilities as determined by UiTM Solar according to an independent third-party expert. Other key assumptions include escalation of 3.3% per annum in O&M fees and panel degradation of 0.6% per annum. Based on the P90 resource probability scenario, project debt coverage is deemed satisfactory with minimum and average pre-distribution finance service cover ratios (FSCR) with cash of 2.11 times (2019) and 3.70 times respectively throughout the sukuk tenure.
UiTM Solar’s cash flow coverage remains adequate under MARC’s stress scenarios of lower plant performance ratio, a six-month delay in project completion and project cost overruns of 5%. Mitigating potential debt service shortfalls is the requirement to maintain a minimum required balance in the finance service reserve account (FSRA) of the next six-months’ profit and/or principal payments and the post-distribution FSCR of 1.50 times.
The stable outlook reflects MARC’s expectations that the project will achieve COD within the allocated budget and the project sponsor will adhere to commitments and obligations under the financing structure. The rating may be revised upwards if the project consistently achieves energy output exceeding projected estimates, resulting in stronger average FSCR with cash.
Wan Abdul Muiz Ghafar, +603-2717 2939/ email@example.com;
Yap Lai Ken, +603-2717 2947/ firstname.lastname@example.org.