Published on 24 Jan 2022.
RAM Ratings has reaffirmed the AA3/Stable rating of Tanjung Bin Energy Sdn Bhd’s (TBE) RM4.5 bil Islamic MTN Programme (2021/2041) (the Sukuk).
TBE is an independent power producer that owns and operates an ultra-supercritical 1,000 MW coal-fired power plant in Tanjung Bin, Johor (the Plant) under a 25-year power purchase agreement (PPA) with Tenaga Nasional Berhad, expiring in March 2041.
The reaffirmation is premised on TBE’s strong and stable cashflow generating capability, which underscores its ability to service financing obligations under the Sukuk. The Plant demonstrated an improved operational performance in 8M FY Dec 2021 which saw its rolling unscheduled outage rate easing to 1.79% as at end-August 2021 (end-December 2020: 7.33%) against the 6% limit stipulated in the PPA. As a result, TBE earned full available capacity payments (ACPs) for the period (FY Dec 2020: ACP losses of RM45.4 mil) as per the terms of the PPA. Correspondingly, the Company’s pre-tax profit was a better RM46.0 mil (FY Dec 2020: RM27.5 mil).
In March 2021, the Sukuk’s initial issuance proceeds of RM2.97 bil were utilised to fully repay amounts owed by TBE to its 100%-owned subsidiary and turnkey contractor, Tanjung Bin Energy Issuer Berhad (TBEI), in respect of the latter’s RM3.29 bil Sukuk Murabahah. TBEI’s financial commitments are supported by back-to-back payments from TBE pursuant to a turnkey contract between the entities. TBEI still shoulders outstanding amounts under term loans of RM700 mil and USD400 mil (collectively, the Senior Loan Facilities).
The RM3.29 bil Sukuk Murabahah and Senior Loan Facilities were previously raised by TBEI to fund the construction of the Plant. Proceeds from TBE’s proposed subsequent issuance of up to RM1.2 bil under the Sukuk will be utilised to settle all outstanding amounts of the Senior Loan Facilities, an exercise which is targeted to be concluded by 2022. Subsequent issues under the Sukuk will be subject to conditions including the absence of an adverse impact on the rating of the Sukuk following the additional drawdown.
The proposed subsequent issuances will smoothen TBE’s repayment profile as two balloon repayments on the Senior Loan Facilities, due in 2024 and 2027, will be removed upon full settlement. TBE however will be subject to refinancing risk in the future. As the repayment profile of TBE’s initial issuance under the Sukuk mirrors that of TBEI’s RM3.29 bil Sukuk Murabahah, a RM650 mil balloon repayment in 2032 will be retained.
The Plant’s long-term viability and residual cashflow will provide ample room for a refinancing exercise closer to 2032. These factors are supported by TBE’s strong minimum and average annual FSCRs (with cash balances, post distribution) of 1.50 times and 1.88 times, respectively, taking into consideration the profile of the proposed subsequent issuance and the amortised debt repayment profile of the balloon repayment at stressed refinancing rates. Despite the Plant’s improved performance, our sensitised cashflow analysis has incorporated ACP reductions and fuel losses in certain years, penalties for a potential failure to meet Availability Targets under the PPA in the future, as well as higher operating and capital expenses to cater for unexpected operational hiccups.
We are cognisant of increasing challenges in accessing funding for coal-fired power plants in view of climate-related concerns. Should a refinancing exercise fail to materialise for the 2032 balloon repayment, TBE’s liquidity profile is expected to be supported by standby letters of credit (SBLCs) to be procured with recourse to its holding company, Malakoff Corporation Berhad. The terms of the Sukuk include the curtailment of shareholder distributions and placement of SBLCs prior to the balloon repayment, to preserve TBE’s liquidity. While TBE is anticipated to generate robust and fairly predictable cashflow, its liquidity profile may be further backed by SBLCs procured in lieu of cash in its finance service reserve account (FSRA) and maintenance reserve account (MRA). The FSRA and MRA are currently fully funded by cash.
Listed on Bursa Malaysia in May 2015, Malakoff has a long-established presence in the power sector and boasts the biggest portfolio of independent power producers (IPPs) in Peninsular Malaysia. As the Plant is Malakoff’s single largest generating unit, we believe it is strongly committed to TBE, as seen in equity injections from Malakoff in the past. Malakoff’s sound business profile and more diversified power business will be key considerations for financial institutions in the provision and renewal of SBLCs in the future.
Like other IPPs, TBE remains exposed to regulatory and single-project risks. The impact of force majeure or a major operational failure will be amplified in view of the Plant’s single generating unit. The Company maintains a comprehensive array of insurance policies but these may not fully compensate it for financial losses arising from such an event on a timely basis. As an essential service provider, TBE’s operations have stayed largely unaffected by movement restrictions during the Covid-19 pandemic.
Lee Jo Yee
(603) 3385 2583
Chong Van Nee, CFA
(603) 3385 2482
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