Published on 03 Jun 2022.
RAM Ratings has downgraded the rating of SPR Energy (M) Sdn Bhd’s (SPR or the Company) Senior Sukuk Ijarah of RM580 mil (the Sukuk) to BBB2 from AA3. The rating outlook remains negative. SPR is an independent power producer (IPP) that owns and operates a 100 MW combined-cycle, gas turbine power plant in Kimanis, Sabah (the Plant).
The downgrade reflects SPR’s significantly weakened cashflow buffers which are not expected to recover in the next few years. Further delays in carrying out repair works, compounded by its continuous operational issues and hefty capital expenditure (capex) needs, had resulted in the Plant’s significant underperformance against RAM’s expectations. In the medium term, we expect the Company’s minimum and average annual finance service coverage ratios (FSCRs, with cash balances, post-distribution, calculated on payment dates) to be 1.23 times (in July 2023) and 1.46 times, respectively – levels that are commensurate with RAM’s threshold for a BBB2 rating.
We have maintained the negative outlook in view of our concerns that SPR might not meet the transaction’s financial covenants (in January 2023) caused by the cumulative effects of cashflow underperformance. The covenant in question requires the Company to have a minimum balance in the Finance Service Reserve Account (FSRA) that is equivalent to its financing obligations for the next six months. SPR has 30 days to remedy the possible covenant breach. Failure to do so will be an event of default for the Sukuk. We note that the RM52.7 mil of funds in the FSRA are currently sufficient to meet RM51.7 mil of principal and profit payments falling due on 17 July 2022.
Apart from FY Dec 2019, the Plant has experienced continuous operational challenges since it started operating. As of end-December 2021, the Plant’s rolling unscheduled outage rate stayed high at 6.31%, against the Power Purchase Agreement’s (PPA) strict limit of 4%. Consequently, SPR incurred RM8.97 mil of Available Capacity Payment (ACP) losses, equivalent to 14% of the year’s full ACPs. Forced shutdowns were necessitated in 2021 mainly by recurring complications with one of the Plant’s heat recovery steam generators (HRSG 2). Unexpectedly, SPR’s plan to bring in foreign technical support from China to remedy these issues in 2H FY Dec 2021 was severely delayed by continued travel curbs amid the pandemic and work permit glitches. As all necessary parts and equipment have been available onsite since September 2021, management now expects remedial work to begin in 2H FY Dec 2022. Although China has recently eased its lockdown restrictions, RAM does not discount the possibility of further delays in carrying out the necessary work.
Over the past five years, SPR has incurred cumulative ACP losses of RM36.09 mil, which significantly exceed the approximate RM7 mil projected in our initial rating exercise. Capex requirements estimated for 2021 to 2024 stand at a heavy RM9.65 mil, which is essential to fund HRSG2 repairs, operational updates and major inspections. Taken together, the cumulative ACP losses and capex outflow are expected to weaken the Company’s cash accumulation capabilities, hampering its debt servicing ability throughout the Sukuk’s tenure. RAM currently foresees a persistent recurrence of the potential covenant breach to SPR’s minimum FSRA balance on every 17 January. If SPR fails to turn around its operational and cashflow performance soon, the FSCR may even dip below 1 time in the medium term, underscoring the urgency to address the Plant’s performance issues and transaction liquidity to support the Sukuk’s obligations.
Despite the challenges, SPR’s business fundamentals remain underscored by the terms of its PPA, under which performance requirements are stricter compared to PPAs of other RAM-rated IPPs. The Company is entitled to earn fixed ACPs, irrespective of the quantum of electricity generated, so long as it meets its unscheduled outage limits. SPR may also fully pass through fuel expenses to its sole offtaker, Sabah Electricity Sdn Bhd (SESB), if it operates within the PPA’s heat rate limits, which the Company has consistently adhered to. SESB is deemed a strong counterparty on account of ongoing financial support that it receives from the Federal Government. Receivables from SESB have generally been promptly settled within two months of receipt of invoice.
Seri Nuralya Munawir
(603) 3385 2484
Chong Van Nee, CFA
(603) 3385 2482
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Ratings on SPR Energy (M) Sdn Bhd