Published on 22 Jul 2019.
RAM Ratings has reaffirmed the AA3/Stable rating of Tanjung Bin Energy Issuer Berhad’s (TBE Issuer or the Company) RM3.29 billion Sukuk Murabahah (2012/2032). Despite lingering operational challenges, the rating remains underpinned by TBE Issuer’s strong debt-servicing ability, complemented by the favourable terms of the power purchase agreement (PPA) between its parent company, Tanjung Bin Energy Sdn Bhd (TBE), and Tenaga Nasional Berhad (TNB).
TBE Issuer is the contractor and financing conduit for TBE’s 1,000 MW ultra-supercritical coal-fired power plant in Tanjung Bin, Johor (the Plant). TBE Issuer’s financial commitments are supported by back-to-back payments from TBE pursuant to a turnkey contract between them. As such, RAM considers the strong credit link between these entities and views them in aggregate.
Pursuant to its PPA, TBE is entitled to earn full available capacity payments (ACPs) irrespective of the quantum of electricity generated, subject to meeting certain performance requirements. However, the Plant’s persistent operational issues have caused its rolling 365-day unscheduled outage rate (UOR) to consistently breach the first threshold of 6% under the PPA since January 2017. As at end-December 2018, its UOR remained high at 13.14%, before easing to 7.38% as at end-May 2019.
Despite the above, TBE’s ACP reductions, operating expenses (opex) and capex were lower than expected in FY Dec 2018, leading to a finance service coverage ratio (FSCR, with cash balances, post-distribution) of 2.21 times as at end-March 2019, i.e. higher than our projected 1.67 times. Irrespective of lengthy unscheduled outages, the Plant’s efficiency has been trending upwards since it began commercial operations, thereby allowing it to fully pass through its fuel costs to TNB.
Under our sensitised case, the strong debt-servicing ability of TBE Issuer is evinced by its projected minimum and average annual FSCR (with cash balances, post-distribution) of a respective 1.50 and 1.78 times throughout the remaining tenure of the Sukuk. This also takes account of the Company’s healthy liquidity, which is buffered by standby letters of credit – anticipated to be renewed every year – to ensure that the Company’s Finance Service Reserve Account is fully funded. Notably, the amortisation profile of TBE Issuer’s Senior Facilities – comprising the rated sukuk, a USD term loan and a ringgit term loan – include three balloon repayments that expose the Company to refinancing risk, which we have assessed to be manageable.
RAM derives comfort from TBE’s sponsor – Malakoff Corporation Berhad – which boasts a long-established presence and the largest portfolio of independent power producers (IPPs) in the domestic power industry. Malakoff controls 25% of Peninsular Malaysia’s installed capacity. Given TBE’s importance to Malakoff, as evinced by the Plant’s status as the single largest generating unit in the latter’s IPP portfolio, as well as its long-term ownership of IPPs, we believe Malakoff is strongly committed to the Plant. Malakoff has demonstrated its financial support for TBE via six-monthly equity injections – between September 2017 and September 2018 – to service profit payments on the latter’s subordinated Sukuk Wakalah.
TBE has completed the physical work of its jetty within schedule. This structure caters to the Plant’s additional coal requirements. While the construction cost of the jetty is still being finalised, the Company has intimated that there is no additional variation and the project cost is within expectation. To recap, TNB and the Energy Commission (EC) had agreed to include the jetty cost as part of the overall construction cost of the Plant. Under the PPA, TNB and the EC have the right to adjust TBE’s tariff downwards to reflect half of any construction cost savings for the Plant. The overall project cost will be reviewed upon final payment of the jetty’s construction cost. It is expected that the tariff will not be revised as the project cost of the jetty exceeds the initial cost savings for the Plant.
As with other IPPs, TBE and, ultimately, TBE Issuer, remain exposed to regulatory and single-project risks. Furthermore, the impact of force majeure or a major operational failure will be amplified by the Plant’s configuration of a single generating unit compared to other IPPs’ multiple units.
Chin Wynn, CFA
(603) 3385 2515
(603) 3385 2577
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Ratings on Tanjung Bin Energy Issuer Berhad