Published on 21 Oct 2019.
RAM Ratings has assigned a preliminary AA3/Stable rating to Halpro Engineering Sdn Bhd’s RM195 mil ASEAN Green SRI Sukuk (2019/2038) (the Proposed Sukuk). Halpro’s Green Sukuk Framework has been reviewed by RAM Sustainability Sdn Bhd.
Under a 21-year Power Purchase Agreement (PPA) with Tenaga Nasional Berhad, Halpro has been mandated to design, construct, own, operate and maintain a 30 MWac solar photovoltaic (PV) plant (the Plant) in Pekan, Pahang (the Project). The total estimated project cost of RM264 mil will be funded via the issuance proceeds from the Proposed Sukuk and Redeemable Convertible Preference Shares (RCPS). The RCPS will be subscribed by Halpro’s 49%-shareholder, Pekan Energy I Pte Ltd (a wholly owned subsidiary of Greencells GmbH).
Greencells, a German renewable energy player with more than 110 solar projects globally under its belt (combined capacity in excess of 1.6 GW), will lead the overall implementation of the Project. Greencells is indirectly 50% owned by the Zahid Group, a diversified conglomerate based in Saudi Arabia. Besides being the primary equity contributor, Greencells (via its wholly owned subsidiaries) will also be the turnkey engineering, procurement and construction (EPC) contractor. It will provide operation and maintenance (O&M) services to the Plant under a 10-year O&M Agreement. We view this alignment of interest as key in ensuring the completion and long-term performance of the Project. Meanwhile, Halpro’s 51%-shareholder, Majulia Sdn Bhd, is an experienced local contractor that will oversee land matters and ensure that all necessary approvals are secured.
The preliminary rating reflects Halpro’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 Project will be the first large-scale solar PV facility in Malaysia to utilise bifacial PV modules with single-axis trackers. Halpro estimates a higher energy yield of 8%-14% using a bifacial-tracker setup compared to the typical fixed-monofacial configuration; maintenance requirements are expected to be similar. The Plant’s key components will be procured from reputable and established suppliers – such as JA Solar (modules), Huawei (string inverters) and Powerway (mounting system) – with low equipment failure rates and warranties that are in line with market standards, as concurred by the Independent Technical Advisor (ITA).
Relative to other similarly rated transactions, Halpro has a tight construction time buffer. Owing to earlier delays in the procurement of project funding, Halpro has less than six months left to its targeted completion date of end-March 2020, i.e. three months later than the PPA’s scheduled commercial operations date (SCOD) of 30 December 2019. The PPA may be terminated if the Project fails to be completed within 180 days after the SCOD (or a Longstop Date of 27 June 2020). That said, we expect a low risk of termination based on Suruhanjaya Tenaga’s representation (and historical evidence) that it will give due consideration to projects that show substantial work progress and financial commitments.
As of early October 2019, the Project was about 29% completed, with RM23 mil already spent by Greencells on construction work. The ITA opines that Halpro’s completion target is achievable and is unlikely to extend beyond the Longstop Date, given the benefit of an experienced EPC contractor and various mitigating factors. These include favourable site conditions, reduced scope for interconnection to the grid and the step-up transformer for the Plant (the component with the longest lead time of around six months, and which has already been procured).
Meanwhile, cost overrun risk is largely addressed by Pekan Energy’s Contingent Equity undertaking of RM15 mil (equivalent to 7% of the EPC contract price), which is backed by a bank guarantee (BG). Besides covering cost overruns, the contingent equity will also be available to Halpro for the first two years of the Proposed Sukuk, to cover any shortfall in the Finance Service Reserve Account (FSRA) and/or debt-servicing. This underlines Greencells’ commitment to the Project.
Our sensitivity analysis incorporates a three-month delay in completion from Halpro’s target, after which the Project’s debt-servicing ability is expected to remain robust with a minimum annual finance service coverage ratio (with cash balances, post-distribution, calculated on payment dates) of 2.12 times throughout the tenure of the Proposed Sukuk. Other key sensitivities include less energy output and higher O&M expenses. Halpro’s liquidity profile will be substantially boosted by a superior FSRA requirement under the transaction terms, which is equivalent to a year’s worth of sukuk obligations. This is more than the six-month cushion typically seen in other transactions, thus providing a robust safety net in the event of any temporary and/or unexpected shortfall in cashflow.
The Proposed Sukuk is backed by BGs on multiple fronts, which will be procured by Greencells (via Pekan Energy), for the benefit of the Security Trustee and with no recourse to Halpro. Aside from the contingent equity BG (to be procured as part of the conditions precedent to the issuance of the Proposed Sukuk), the FSRA requirement will also be backed by unconditional and irrevocable BGs. The financing terms entitle the Security Trustee to draw on the BGs under certain circumstances, including failure to renew the BGs and deterioration of the BG provider’s credit rating.
As with other solar projects, Halpro’s electricity production and cashflow in the longer run are vulnerable to the risks of uncertain solar irradiance and plant performance. Diligent O&M practices will be key to ensuring the satisfactory long-term performance of the Plant. Halpro is also exposed to single-project and regulatory risks, although we note the Government’s supportive stance on renewable energy projects.
Chuan Shyang Lin
(603) 3385 2536
(603) 3385 2577
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Ratings on Halpro Engineering Sdn Bhd