Published on 07 Aug 2019.
RAM Ratings has assigned a long-term preliminary rating of AA3/Stable to Cypark Ref Sdn Bhd’s (Cypark Ref, the Issuer) proposed RM550 mil SRI Sukuk Murabahah Programme (2019/2040) (SRI Sukuk Murabahah). Cypark Ref, a wholly owned indirect subsidiary of Cypark Resources Berhad (CRB or the Sponsor), is the appointed turnkey contractor and special-purpose vehicle set up to raise financing for three 30 MWac solar photovoltaic (PV) projects, involving two floating and one ground mounted solar farms. The three solar PV projects are located at Terip Dam, Negeri Sembilan (under Cypark Estuary Solar Sdn Bhd, indirectly 40%-owned by CRB); Kelinchi Dam, Negeri Sembilan (under Cove Suria Sdn Bhd, unrelated to CRB); and Sik, Kedah (under Viva Solar Sdn Bhd, unrelated to CRB). Cypark Estuary, Cove Suria and Viva Solar will be collectively referred to as the Project Companies. CRB is also the sole shareholder of Cypark Renewable Energy Sdn Bhd (CRE), the engineering, procurement, construction and commissioning (EPC) contractor and operation and maintenance (O&M) service provider for the Projects.
As the Issuer’s obligations under the proposed SRI Sukuk Murabahah will be met by the respective turnkey contract payments due from the Project Companies, RAM’s analysis will focus on the underlying project fundamentals and the ability of these companies to meet their respective deferred turnkey payment obligations. We have adopted the weakest-link approach to determine the sukuk rating, as major failures at any of the Projects will lead to an eventual default on the proposed SRI Sukuk Murabahah. The total estimated combined project cost of approximately RM719 mil will be funded via the issuance proceeds of the proposed SRI Sukuk Murabahah (77%), alongside equity injections from CRB (23%). The Project Companies have each signed 21-year Power Purchase Agreements (PPAs) with Tenaga Nasional Berhad (TNB) for the respective solar PV projects, with a scheduled commercial operations date of 31 December 2020.
The rating reflects the Project Companies’ sound business fundamentals, backed by the favourable terms of the PPAs with a strong utility off-taker, as well as the use of proven plant technology. The PPAs accord priority of dispatch to the Project Companies, thereby counterbalancing the absence of fixed availability-based revenue. The lack of moving parts and a combustion function as well as the modular structure of solar PV plants make their construction and O&M more straightforward compared to thermal power plants. Floating solar projects are even simpler, given the less dusty environment and the cooling effect of water that increase operational efficiency.
Despite the less complex nature of solar PV plants, topography issues in Sik and the anchoring system’s design intricacies at the Kelinchi and Terip floating solar PV plants are key completion concerns. Scale-up risk is also a challenge as the Projects, located at different sites, are close to three times larger than CRB’s existing portfolio. That said, we believe these risks have been largely alleviated by CRE’s well-established track record, the satisfactory remaining construction timescale (of close to 20 months including a delay sensitivity of three months), a combined contingency sum of 5% of total EPC costs, the provision of liquidated damages (LDs) and performance guarantees in the form of corporate guarantee from CRB, and relevant insurance coverage. As at early July 2019, the Projects were around 36% complete, as scheduled, provided by CRE.
The preliminary rating is, however, moderated by the variability of solar irradiance and the performance ratio of the Plants, which determines the amount of electricity generated. Solar irradiance is based on satellite data from SolarGIS while the Project Companies’ energy generation is forecasted using PVSyst software – both of which are widely used internationally. The key equipment suppliers have yet to be finalised; RAM’s analysis is based on the equipment model used in the PVSyst report provided by the Issuer, namely JA Solar Holdings Co Ltd (which provides mono-crystalline silicon PV modules); Sungrow Power Supply Co Ltd and Huawei Technologies Co Ltd (for inverters). Despite the yet-to-be confirmed suppliers, CRE has indicated that the final chosen suppliers will be among the industry’s Tier-1 manufacturers while the models will be of an equivalent or better specification, as required under the PPAs.
Based on RAM’s sensitised cashflow analysis, each of the Project Companies’ debt-servicing ability is expected to be strong, with a minimum annual finance service coverage ratio (FSCR, with cash balances, post-distribution and calculated on deferred turnkey payment dates) of 1.50 times throughout the tenure of the proposed SRI Sukuk Murabahah. The Project Companies and the Issuer are anticipated to sustain a respective distribution FSCR covenants of at least 1.50 times and 1.25 times on a forward-looking basis throughout the transaction’s tenure, as opposed to only in the year of assessment.
While we note the potential conflicts of interests given the different ownership structures of the Project Companies, we believe this risk will be adequately addressed via the execution of the Tripartite Security Deeds – binding Cypark Ref, the Project Companies and the Security Agent – as well as the covenants imposed on the Project Companies to limit their activities and indebtedness and manage distribution payments, to better align the interests of the various stakeholders. The appointment of a single turnkey contractor, EPC contractor and O&M service provider for all three projects and CRB’s role as the ultimate sponsor is another positive factor that helps support the continued performance of the proposed SRI Sukuk Murabahah.
CRB has an established presence in the local solar sector, having been in the industry since 2011. To date, it has completed more than 17 projects in line with the respective renewable energy PPA requirements, with no LDs payable to TNB or cost overruns incurred. As a first mover in the solar space and long-term player in the renewable energy space, we believe the Sponsor has sufficient incentives to remain strongly committed to the execution and long-term operations of the Plants. CRB’s aggressive expansion in the last few years, however, has stretched its financial position. The Sponsor’s adjusted gearing ratio hit a high of 0.99 times as at end-FY Oct 2018 while its debt coverage metrics stayed sluggish; funds from operations debt coverage averaged at only 0.09 times in the last three years. Having said that, these were largely skewed by the hefty long-term borrowing profile of CRB (ranging from 10 to 13 years) to help finance the Group’s long-term projects. The financial prospect is envisaged to improve with the expected completion of CRB’s waste-to-energy concession project in the immediate future, which should contribute RM80 mil of annual revenue (equivalent to 24% of fiscal 2018 revenue) over the next 25 years.
Chu Jia Ying
(603) 3385 2519
(603) 3385 2577
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