Published on 06 Jul 2021.
RAM Ratings has reaffirmed the AA3/Stable rating of Telekosang Hydro One Sdn Bhd’s (TH1) RM470 mil ASEAN Green SRI Sukuk under the Shariah principle of Wakalah Bi Al-Istithmar (2019/2037) (the Senior Sukuk). Concurrently, we have also reaffirmed the A2/Stable rating of its RM120 mil ASEAN Green Junior Bonds (2019/2039) (the Junior Bonds). The ratings are reaffirmed because the ultimate shareholder of TH1 (Jentayu Capital Sdn Bhd) has procured a bank guarantee (BG) from MIDF Amanah Investment Bank Berhad to provide liquidity buffer to offset potential loss of cashflow arising from construction delays currently experienced by the small hydro power plants of TH1 and Telekosang Hydro Two Sdn Bhd (TH2) (collectively, Telekosang or the Group). Both are located in Tenom, Sabah with a total installed capacity of 40 MW (the Plants or the Project).
TH1 and TH2 have each signed 21-year Renewable Energy Power Purchase Agreements (REPPAs) with Sabah Electricity Sdn Bhd pertaining to the Plants. Although TH1 is the issuer of the Senior Sukuk and the Junior Bonds to finance the Project, cashflow from TH2 will also support the repayment. TH1 and TH2 are joint signatories for the relevant financing agreements.
As at end-May 2021, the Plants were 86.53% and 89.77% completed, respectively (scheduled completion: 99.05% and 99.37%). These are equivalent to about seven and five months of delay for TH1 and TH2, respectively, exceeding our earlier sensitised assumption of three months each. The Independent Technical Advisor and Telekosang now expect the Plants to be completed and commissioned by 31 December 2021, which is tantamount to a five-month delay from the Scheduled Feed-In Tariff Commencement Date of 31 July 2021.
Apart from inclement weather, the Plants’ construction progress has also been held up by the COVID-19 pandemic – the result of stringent work protocols and travel restrictions against in-bound foreign workers. Given the current pandemic and the slew of potential consequences, we do not discount further setbacks in the Plants’ completion. RAM’s cashflow analysis factors in an additional three-month delay versus Telekosang’s expectations.
To alleviate foreseeable liquidity pressure arising from such delays, the ultimate shareholder of TH1, Jentayu Capital, has procured a BG facility. The RM25 mil BG is meant to cover any shortfall in Telekosang’s finance service reserve account to meet the Senior Sukuk’s periodic principal and profit payments. The facility will be irrevocable and unconditional, for Telekosang to draw upon as needed from February to September 2022. Considering the BG facility against revenue loss from completion setbacks up to end-March 2022, Telekosang is projected to achieve respective sensitised minimum and average annual finance service coverage ratios (FSCRs) of 1.76 and 2.57 times throughout the Senior Sukuk’s tenure (within our AA3 rating threshold).
Meanwhile, the ratings are further backed by Telekosang’s favourable REPPA terms, strong project fundamentals and the management’s expertise in hydro power generation. Global Elite O&M Sdn Bhd – a joint-venture company under the original equipment manufacturer (Global Hydro Energy GmbH Austria) – is the operations and maintenance (O&M) service provider via a 16-year O&M Agreement. This underlines a strong alignment of interests that is also favourable to the Project.
Despite having minimal demand risk, Telekosang will face uncertain long-term rainfall patterns and river flows, which determine the Plants’ ability to generate power. Any future development in the Plants’ catchment area or climate change could alter hydrological conditions. Since December 2017, the Telekosang River’s average flow rate has been more than doubling the rates assumed under the Plants’ design and RAM’s cashflow projections.
The rating of the Junior Bonds is notched down from that of the Senior Sukuk, premised on the former’s strong equity-like features and deep subordination to the latter in terms of cashflow priority. The Junior Bonds are supported by a minimum annual FSCR of 1.45 times during their tenure; this commensurates with the benchmark FSCR for an A2 rating. The Junior Bonds have been structured as zero-coupon bonds, with repayment only starting after the full redemption of the Senior Sukuk, i.e. in August 2038 and August 2039.
Yip Chee Meng
(603) 3385 2516
Chong Van Nee, CFA
(603) 3385 2482
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Ratings on Telekosang Hydro One Sdn Bhd