Published on 06 Sep 2019.
RAM Ratings has assigned a preliminary AA2/Stable rating to Edra Solar Sdn Bhd’s (Edra Solar or the Company) proposed RM245 mil ASEAN Sustainability SRI Sukuk (2019/2037) (Proposed Sukuk). The Proposed Sukuk will be the country’s first to be aligned with the requirements of Securities Commission Malaysia’s Sustainable and Responsible Investments (SRI) Sukuk Framework, the ASEAN Green Bond Standards, the ASEAN Social Bond Standards as well as the globally recognised Green Bond Principles, Social Bond Principles and Sustainability Bond Guidelines. Edra Solar’s Sustainability SRI Sukuk Framework has been reviewed by RAM Consultancy Services Sdn Bhd.
Under a 25-year Power Purchase Agreement (PPA) with Tenaga Nasional Berhad, Edra Solar is contracted to design, construct, own, operate and maintain a solar photovoltaic (PV) plant with a capacity of 50 MWac (the Plant or the Project) in Kuala Ketil, Kedah. Incorporating a social element into the Project, Edra Solar has allocated a buffer zone surrounding the solar farm facility to the local community for the cultivation of pineapples and/or other crops. The Proposed Sukuk, equivalent to 78% of the total project cost, is intended to partly refinance the shareholder’s loan obtained to fund the construction of the Plant. Edra Solar is a wholly owned subsidiary of Edra Power Holdings Sdn Bhd (Edra Power – rated AA1/Stable/P1 by RAM), the country’s second-largest independent power producer (IPP) group.
The preliminary rating reflects Edra Solar’s sound project fundamentals, backed by the favourable terms of the PPA with a strong utility off-taker, as well as the use of proven solar technology. The Plant was completed ahead of the scheduled commercial operations date in the PPA and within budget. The PPA accords priority of dispatch to the Company, thereby counterbalancing the absence of fixed availability-based revenue. The lack of moving parts and a combustion function and the modular structure of solar PV plants render operations and maintenance (O&M) works uncomplicated. The O&M of the Project is managed within the Edra Power group, enabling the Project to leverage on the expertise of the larger group, whose personnel have over 20 years of operating experience.
Based on RAM’s stressed scenario, Edra Solar’s debt servicing ability is deemed robust, with a minimum annual finance service coverage ratio (FSCR, with cash balances, post-distribution, calculated on payment dates) of 1.69 times throughout the tenure of the Proposed Sukuk – a level that is commensurate with an AA2 rating. Key sensitivity assessment in our cashflow analysis includes lower energy generation volumes and higher inverter replacement costs.
In lieu of cash holdings in the Finance Service Reserve Account, the transaction will be supported by a standby letter of credit (SBLC) facility to be procured by Edra Power. We expect Edra Solar to be able to rely on the renewable SBLC without constraints. The Proposed Sukuk is further backed by more stringent distribution covenants, requiring coverage to include both the next scheduled principal and aggregate profit payments for the calculation period, in view of its more staggered and uneven repayment profile. This helps limit distributions more effectively, preserving the Company’s liquidity and annual FSCR profile.
Edra Solar uses well-established polycrystalline PV modules manufactured by Shanghai JA Solar Technlogy Co Ltd and string inverters produced by Huawei Technologies Co Ltd, both of which are Tier-1 manufacturers with leading brands in terms of performance and reliability in the solar industry. Based on its first five months of operations from March to July 2019, the Plant’s energy generation (38,493 MWh) has outperformed the independent technical advisor’s initial forecast (36,150 MWh).
That said, the Company’s electricity and cash generation over the longer term are still vulnerable to the risks of uncertainty in solar irradiance and plant performance. Diligent O&M practices remain key to ensuring satisfactory long-term performance of the Plant. As with other IPPs, Edra Solar remains exposed to single-project and regulatory risks, although we note the Government’s supportive stance on renewable energy projects.
Chong Van Nee, CFA
(603) 3385 2482
(603) 3385 2577
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Ratings on Edra Solar Sdn Bhd