Published on 30 Jun 2020.
RAM Ratings has assigned AAA/Stable rating to Tenaga Nasional Berhad’s (TNB or the Group) proposed RM10 bil Islamic MTN Sukuk Wakalah Programme (2020/2070) and P1 rating to its proposed RM2 bil Islamic CP Sukuk Wakalah Programme (2020/2027) (collectively referred to as the Proposed Sukuk). Concurrently, we have maintained the AAA/Stable rating of TNB’s existing RM5 bil Islamic MTN Sukuk Wakalah Programme (2017/2067).
The ratings are premised on the Group’s strategic position as Malaysia’s national electricity company, as well as its resilient operating and financial performance. Based on RAM’s rating methodology for government-linked entities, TNB is highly likely to receive extraordinary government support in the event of financial distress, even after the implementation of industry reforms and the recent change in government. This is premised on the critical role that the Group plays in the Malaysian power sector and its very strong relationship with the Government.
In terms of balance sheet strength, the Group has sufficient headroom for additional borrowings. TNB intends to draw down RM3 bil under the Proposed Sukuk this year to finance its capital expenditure and investment, among other purposes. Besides a higher debt level, our stressed cashflow analysis also assumes heftier operating expenses and lower electricity sales as a result of the subdued economic conditions induced by COVID-19 this year. Although this will slightly weaken the Group’s funds from operation (FFO) debt coverage and gearing ratio to a respective 0.19 and 1.36 times in fiscal 2020 (our earlier projections: 0.22 and 1.41 times), the ratios remain supportive of its ratings.
Meanwhile, the Incentive-Based Regulation (IBR) framework is a credit positive as it provides TNB with stable returns in each three-year Regulatory Period (RP), on top of an established imbalance cost pass-through mechanism. Although TNB could, in the long run, be subjected to lower allowable returns and more stringent requirements in respect of its regulated business, the IBR provides earnings certainty and enables the Group to retain efficiency savings if it outperforms regulatory assumptions. Given the softer electricity demands this year, we expect TNB to register a temporary decline in FFO by 10% this year. The IBR framework is also designed to allow TNB to recoup this revenue shortfall via regulatory adjustments.
TNB enjoys a virtual monopoly over the transmission and distribution of electricity throughout Peninsular Malaysia and Sabah. It controlled 60.5% of the peninsula’s generating capacity as at end-March 2020. The Group also plays a crucial role as the sole off-taker of generating capacity and electrical energy produced by independent power producers in Peninsular Malaysia.
Chu Jia Ying
(603) 3385 2519
(603) 3385 2577
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