MARC has affirmed its AAAIS rating on TNB Western Energy Berhad's (TNB Western Energy) Islamic Sukuk (sukuk) of up to RM4.0 billion with a stable outlook. TNB Western Energy is a wholly-owned funding vehicle of TNB Manjung Five Sdn Bhd (TNB Manjung Five), which is in turn a wholly-owned subsidiary of Tenaga Nasional Berhad (TNB). TNB Manjung Five was incorporated to undertake the construction, operation and maintenance of a 1,000-megawatt (MW) ultra-supercritical (USC) coal-fired power plant located at Manjung, Perak under a 25-year power purchase agreement (PPA) with TNB. MARC has maintained issuer and long-term senior debt ratings of AAA/Stable on TNB based primarily on the high likelihood of support from the government premised on its critical role in the local power industry, a sound operational track record, as well as its satisfactory debt service coverage.
The affirmed rating on TNB Western Energy is equalised with that of its ultimate parent TNB due largely to TNB's project completion support and rolling guarantee for the finance service payments on the sukuk. TNB's credit support in the form of funding commitments for project cost overruns of up to 10% and funding support for scheduled distributions on the sukuk for up to a 12-month period post scheduled commercial operation date (COD) of October 1, 2017 substantially mitigate the project risks during the construction phase. Although TNB's rolling guarantee only covers scheduled semi-annual distributions (principal and profit payments) on the sukuk on a non-accelerable basis, MARC opines that the rolling guarantee provides assurance of timely debt service payments in the event of plant underperformance. TNB Manjung Five's operational linkages to TNB, which is the project sponsor and offtaker, further underpin MARC's assessment of a high level of implicit parental support.
The financing mix for the project is estimated at 71:29 comprising the sukuk proceeds and sponsor's equity contribution. The sponsor's equity will be a combination of direct equity and/or TNB-guaranteed equity bridge financing which is subordinated to the sukuk. As at July 31, 2014, the project's finance-to-equity ratio (FER) stood at 28:72, which is below the maximum pre-COD FER covenant of 80:20. Except for the final principal repayment amount due in 2033, the project revenues from the sale of capacity and energy under the PPA will be sufficient to meet its scheduled financial obligations, subject to meeting all the performance requirements as stipulated in the PPA. This is shown in the base case cash flow projection's minimum and average semi-annual finance service cover ratios (FSCR) of 1.27 times and 1.31 times respectively. MARC's sensitivity analysis indicates that the project cash flows will be able to withstand moderate plant performance shortfalls with the minimum semi-annual FSCRs (with cash balances) to be above 1.00 time. In the event of more severe and/or prolonged stress on the project cash flows during the operational phase, MARC believes that the sponsor's rolling guarantee and working capital facilities will address the short-term liquidity risks and expects that the project company to limit distribution to shareholders in order to restore its cash reserves. The aforementioned balloon repayment amount of RM1.3 billion in 2033 introduces TNB Western Energy to a significant refinancing risk which MARC believes is effectively transferred to TNB through the rolling guarantee.
The project's engineering, procurement and construction (EPC) works are carried out by a consortium comprising Sumitomo Corporation, Daelim Industrial Co Ltd (Daelim), Sumi-Power Malaysia Sdn Bhd and Daelim Malaysia Sdn Bhd. As at September 30, 2014, the overall EPC progress is slightly ahead of schedule with actual completion progress at 25.78% against planned progress of 22.73%, while the actual project cost accrued was broadly within budget and in line with the project milestone. This is backed by the project's independent technical and environmental advisor Pöyry Energy Sdn Bhd in their latest monitoring report indicating no major delay risks at this juncture. MARC views that the deferment of the deadline to conclude the Jetty Terminal Usage Agreement No. 3 to April 30, 2015 from July 31, 2014 will not pose significant risk to the project commissioning schedule given the ample time for the relevant facilities to be ready before the initial firing of the boiler on January 2, 2017.
The stable outlook reflects the outlook on TNB's unsecured senior rating. In addition, the stable outlook also takes into account the rating agency's expectation of no major delay risks in the project over the next 12 months. As the rating and outlook of TNB Western Energy are equalised with those of TNB, they are sensitive to changes in the latter's credit profile.
Contacts: Ng Suk Yee, +603-2082 2272/ sukyee@marc.com.my: David Lee, +603-2082 2255/ david@marc.com.my.
© Press Release 2015
