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RAM Ratings reaffirms Tadau Energy’s AA3 sukuk rating
Published on 12 Oct 2018.
RAM Ratings has reaffirmed the AA3/Stable rating of Tadau Energy Sdn Bhd’s (Tadau or the Company) RM250 million SRI Sukuk Programme (2017/2033). The rating reflects Tadau’s strong debt-servicing ability as steady cashflows are expected to be generated from the Company’s solar photovoltaic (PV) plants totaling 50 MW in Kudat, Sabah (collectively referred to as “the Plants”), now that the Plants have achieved commercial operations. Tadau’s plants are the country’s first large-scale solar power project to be connected to the grid, while its sukuk is the world’s first sustainable and responsible investment (SRI) green sukuk.
The commercial operations date (COD) of Tadau’s 48-MW unit (Unit 2) fell on 26 September 2018, which was a delay of close to 6 months compared to the originally scheduled 31 March 2018. The main reasons for the delay in completion of Unit 2 are challenges in scheduling the testing and commissioning works, the unfamiliarity of the engineering, procurement and construction contractor with domestic regulations and in managing local workers, and a change in the Malaysian Construction Industry Development Board’s policy on the approval and inspection of imported steel structures, used for the mounting of PV panels.
The rating continues to reflect Tadau’s sturdy project fundamentals, underscored by its long-term power purchase agreements (PPAs), which require Sabah Electricity Sdn Bhd to accept and purchase all energy generated by the Plants, up to a specified limit. This priority of despatch enjoyed by Tadau moderates the absence of fixed availability-based revenue typically earned by thermal power plants. In addition, the operational complexity of solar PV plants such as the Company’s is lower than that of thermal power plants due to the absence of moving parts and a combustion function.
Despite the delay in completion, Tadau is envisaged to have a strong debt-servicing ability, with minimum and average FSCRs (with cash balances, post-distribution) of a respective 1.50 times and 1.80 times throughout the transaction’s tenure. This is under RAM’s sensitised cashflow analysis, which assumes lower energy generation due to unforeseen outages, as well as lower established capacity, plant efficiency and Energy Rate. We expect Tadau to adhere to its distribution covenant on a forward-looking basis throughout the transaction’s tenure, as opposed to only in the year of assessment. Any excessive unexpected opex/capex or distribution to shareholders would exert downward pressure on the rating.
The rating is, however, moderated by the risk of variability in solar irradiance and performance ratio of the Plants. There is also a provision in Tadau’s PPAs for a reduction in energy rates if there are any savings in construction and financing costs achieved upon the COD and a year after the COD. In addition, there is a potential risk of higher operational expenses and other project costs, in which we caution that any material deviation in projected expenditure would warrant a rating reassessment.
Analytical contact
Chin Wynn, CFA
(603) 7628 1170
chinwynn@ram.com.my
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
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Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
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