MARC has affirmed its AA-_IS rating on UiTM Solar Power Sdn Bhd’s (UiTM Solar) Green SRI Sukuk of up to RM240.0 million. The outlook on the rating is stable.

UiTM Solar is the project owner of a greenfield solar power plant with a capacity of 50MWac in Gambang, Pahang. The project is 94.0% completed as at November 7, 2018, according to the independent consulting engineer and is expected to achieve commercial operation date (COD) by end-February 2019 following a four-month delay from the initial scheduled COD.

The affirmed rating is based on MARC’s expectation that the project will be completed well before the walkaway event day on April 30, 2019. The rating incorporates UiTM Solar’s healthy project fundamentals on the back of its 21-year solar power purchase agreement with Tenaga Nasional Berhad (TNB) to meet its financial obligations during the operational phase. The rating is moderated by the variability of solar resource which determines the amount of electricity generated.

The construction delay is mainly due to a seven-month deferment of the financial close to March 30, 2018 and the longer-than-expected completion works on the interconnection facilities at the plant. Capex during construction, however, has remained within budget with increases in development expenses at the plant met by funds from the contingency buffer. There were also additional savings from forex hedging, gained from the US dollar portion of the engineering, procurement and construction (EPC) contract and zerorisation of the GST effective June 1, 2018.

While UiTM Solar could be liable to pay liquidated damages (LD) to TNB given the failure to meet the scheduled COD, the LD payment of RM50,000 for each day of delay is expected to be recovered from EPC contractor, ET Energy (Malaysia) Sdn Bhd (ETEM). Any further cost overruns are mitigated by a bank guarantee of up to RM7.0 million from UiTM Holdings, expiring on May 1, 2019.

UiTM Solar has applied international benchmarks in its cash flow forecast which are consistent with solar farms in an equatorial environment. The operations and maintenance (O&M) work will be undertaken by ETEM under a five plus two plus two-year contract. The O&M job scope of a solar power plant is relatively less complicated compared to a conventional power plant, which mitigates operational risks. UiTM Solar is covered by equipment warranties that are in line with industry standards. On top of that, a maintenance reserve account will be built up over five years from COD to cover contingencies for major maintenance works, inverters and consumable replacements.

Under MARC’s sensitised scenarios, UiTM Solar’s cash flow coverage remains adequate as the company would be able to comply with the minimum financial service cover ratio (FSCR) of 1.25x throughout the tenure of the sukuk. However, should the project be delayed beyond February 28, 2019, with LDs payable to TNB (without LD receivables from the EPC contractor), the project’s FSCR could breach the 1.25x covenant in 2019.

The stable outlook reflects MARC’s expectation that the project will achieve COD before the walkaway event date within the allocated budget and the project sponsor will adhere to commitments and obligations under the financing structure.

Contacts:
Wan Abdul Muiz Wan Abdul Ghafar, +603-2717 2939/ muiz@marc.com.my;
Lim Hui Boon, +603-2717 2959/ huiboon@marc.com.my