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MARC affirms its AAAIS(bg) and AAAIS(fg) ratings on Ranhill Power Sdn Bhd's RM800 million Sukuk Musharakah facility

MARC has affirmed its rating of AAAIS(bg) and AAAIS(fg) on Ranhill Power Sdn Bhd's (Ranhill Power) RM300 million bank guaranteed (Tranche 1) and RM500 million Danajamin Nasional Bhd (Danajamin) guaranteed (Tranche 2) Sukuk Musharakah facility respectively. The outlook for both ratings is maintained at stable.

The rating on Tranche 1 reflects the credit strength of an unconditional and irrevocable guarantee provided by Maybank Islamic Berhad (MIB) which is rated AAA/stable by MARC. The rating on Tranche 2 reflects the credit strength of an unconditional and irrevocable Kafalah Guarantee provided by Danajamin, on which MARC currently maintains an insurer financial strength rating of AAA/stable.

The proceeds from Ranhill Power's RM800 million sukuk issuance were onlent to its holding company, Ranhill Berhad (Ranhill), to be utilised to early redeem in full Ranhill's US$220 million bonds in June 2011. The source of repayment for Ranhill Power's sukuk issuance is expected to be mainly from all payments, including but not limited to dividends, from three key companies within the Ranhill group: SAJ Holdings Sdn Bhd (SAJH), which is involved in water supply services in Johor; and two independent power producers based in Sabah, Ranhill Powertron Sdn Bhd (RPI) and Ranhill Powertron II Sdn Bhd (RPII). On a standalone basis, the sukuk are subject to moderate credit risk given the fairly predictable utility-like earnings stream of the water distribution business of SAJH and power generation operations of RPI and RPII, tempered by Ranhill Power's dependence on residual cash flows provided by RPI and RPII. Ranhill Power's sukuk is structurally subordinated to the operational liquidity needs and debt service needs of the power generation project companies. Ranhill's modest credit protection measures remain a credit weakness. The holding company's recent financial results had also been impacted by significant impairment charges.

In the near- to medium-term, dividends from SAJH, in which Ranhill has an effective 56% interest through 70%-owned Ranhill Utilities Sdn Bhd, is expected to contribute the major portion of cash flow to service the sukuk. SAJH, the sole water distributor in Johor, is largely debt-free following its disposal of its water assets and corresponding liabilities to Pengurusan Asset Air Sdn Bhd (PAAB). For the 18-month period ended December 31, 2011 (FY2011), SAJH contributed about RM106 million (or 88%) of Ranhill's RM120 million of dividend income. MARC notes that the total dividend received was 16.7% less than management's estimate of RM144 million for the period due mainly to higher lease rental rates, which commenced in September 2010 and higher contracted maintenance cost. However, when the concession of two of the companies from which SAJH purchases treated water, Equiventure Sdn Bhd and Southern Water Corporation (SWC), expires in June 2012 and June 2014 respectively, SAJH will be granted the right of use over the water assets of these companies.

SAJH's operating licence will expire on June 30, 2012. MARC understands that Suruhanjaya Perkhidmatan Air Negara (SPAN) will propose a renewal of the licence to the Ministry of Energy, Green Technology and Water for two and a half years, ending December 2014. The proposal follows the performance review of SAJH's key performance indicators (KPI).

The group's power generation companies, RPI and RPII, both of which are held directly under Ranhill Power, have total generating capacity of 380MW, or about 32% of the state's total installed power capacity. The favourable long-term offtake arrangement with the state's utility company, Sabah Electricity Sdn Bhd, remains supportive of their earning generation capacity. Nonetheless, the dividend up-streaming capacities of both entities are expected to be modest in the near to medium term given the significant operating-level debt at both project companies. At the consolidated Ranhill group level, both RPI and RPII accounted for 57.4% of total borrowings of RM2,034.9 million in FY2011.
At the holding company level, Ranhill recorded an operating loss of RM45.4 million (FY2010: profit of RM167.8 million) for the 18-month period from July 1, 2010 to December 31, 2011 on the back of lower dividend income received and significant impairment charges of RM76.7 million related to its investments in Senai-Desaru Expressway and subsidiary Amona-Ranhill Consortium Ltd, which had terminated its housing project in Libya as a result of the social and political unrest in the country. While the debt-to-equity ratio decreased to 0.02 times as at December 31, 2011 (FY2010: 0.10 times), Ranhill's contingent liabilities have increased to RM971.4 million as at February 2012 (FY2010: RM484.3 million), in part due to the guarantee provided on the rated Sukuk Musharakah facility.

MARC notes Ranhill's nominal free cash flow profile for the 18 months to December 31, 2011 and its modest cash and cash equivalent holdings of RM1.2 million as at end-2011. Modest debt maturities in the next three years mitigate the lower level of projected liquidity build-up during these years. Principal redemptions on the sukuk commence only in 2013 with the first repayment of RM5 million, and remain relatively small until 2016. The MIB-guaranteed Tranche 1 portion has tenures up to eight years while the Danajamin-guaranteed Tranche 2 will have tenures ranging from nine to 15 years.

Sukukholders are insulated from downside risks related to the credit profile of Ranhill Power and Ranhill by the guarantees provided by MIB and Danajamin. Any change in the supported ratings or rating outlook would be primarily driven by changes in the credit strength of the guarantors.

Contacts:
Nisha Fernandez, +603-2082 2269/ nisha@marc.com.my
Thian Chow Di, +603-20822280/ chowdi@marc.com.my
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my

© Press Release 2012

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