Published on 14 Jun 2022.
RAM Ratings has placed the respective AA3 and A2 ratings of Telekosang Hydro One Sdn Bhd’s (TH1 or the Issuer) RM470 mil ASEAN Green SRI Sukuk under the shariah principle of Wakalah Bi Al-Istithmar (2019/2037) (the Senior Sukuk) and RM120 mil ASEAN Green Junior Bonds (2019/2039) (the Junior Bonds) on Rating Watch with a negative outlook.
The rating action is premised on our concerns that the Issuer may face severe credit stress in the near term should plans to procure additional liquidity support fail to materialise. A liquidity injection is currently crucial to make up for the absence of cashflow generation amid further delays in the construction of the small hydro power plants of TH1 (Plant 1 – 24 MW) and Telekosang Hydro Two Sdn Bhd (TH2) (Plant 2 – 16 MW) (collectively, the Group). Both plants (the Plants or the Projects) are located in Tenom, Sabah. Combined cashflow generation from TH1 and TH2 supports the repayment of the Senior Sukuk and Junior Bonds, which were previously issued to finance the development of the Plants.
While the Plants had not met our earlier expectation of achieving commercial operations by end-March 2022, construction progress only stood at a respective 97.73% (Plant 1) and 95.72% (Plant 2) as of April 2022. Continuous delays in completion have been caused mainly by manpower shortages, pandemic-related challenges, and inclement weather. With critical labour-intensive waterway works remaining to be done, the Group expects to complete Plant 1 by September 2022 and Plant 2 by November 2022. The Independent Technical Adviser (ITA) concurs with these targets.
We have assumed, however, that the Plants will reach commercial operations by end-December 2022, in line with the extension of time provided by Sustainable Energy Development Authority Malaysia. Notably, delay in the completion of the Plants is not a termination event under the Group’s 21-year Renewable Energy Power Purchase Agreements with Sabah Electricity Sdn Bhd, the offtaker.
In 2021, Jentayu Capital Sdn Bhd (the Group’s ultimate shareholder and transaction sponsor) had successfully procured a RM25 mil bank guarantee (BG) from MIDF Amanah Investment Bank Berhad (MIDF) for TH1 (assigned to the Trustee) to offset cashflow gaps caused by project delays.
Assuming the Plants achieve commercial operations by end-December 2022, our sensitised cashflow analysis indicates that TH1 will potentially breach the minimum finance service reserve account balance requirement under the Senior Sukuk by February 2023. Failure to maintain the covenanted sum will be an event of default. In the absence of further external liquidity support, the Issuer is not expected to have sufficient liquidity to meet its debt obligations by August 2023.
Jentayu Capital and the Group are accordingly making financial arrangements to procure up to RM40 mil to boost the Issuer’s liquidity position. The Group is also negotiating a supplemental agreement with the engineering, procurement, construction and commissioning contractor (Sinohydro Corporation (M) Sdn Bhd) which will allow the Group to withhold a portion of remaining contractual payments payable to Sinohydro. The sponsor has reached out to MIDF, requesting the latter to extend the existing BG or provide a new one.
The rating of the Junior Bonds is notched down from that of the Senior Sukuk to reflect the former’s strong equity-like features and deep subordination to the latter in terms of cashflow priority. The Junior Bonds have been structured as zero-coupon bonds, with repayments starting only after the Senior Sukuk is fully redeemed, i.e., in August 2038 and August 2039.
We expect the Rating Watch to be resolved within the next two to three months based on the progress of the abovesaid liquidity plans. We will continue to monitor the developments closely and make the necessary updates, once further details are available. Should the required financial support not be secured in time, the ratings of the Senior Sukuk and Junior Bonds could be downgraded by multiple notches reflecting our growing concerns over TH1’s ability to meet its financing obligations in the near term.
RAM’s Rating Watch highlights a possible change in an issuer’s debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under RAM’s special surveillance. In a broader sense, the Rating Watch covers any event that may result in changes in risk factors relating to the repayment of principal and interest.
Issues are put on Rating Watch when some of the abovesaid events are expected to or have occurred. The Rating Watch, however, does not mean that the rating will inevitably be changed. It only means that RAM is evaluating the rating and a final affirmation is pending. A ”positive” outlook indicates that a rating may be raised while a "negative" outlook indicates a possible downgrade. A “developing” outlook refers to unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.
Chong Van Nee, CFA
(603) 3385 2482
Wong Ee Loo
(603) 3385 2521
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
© Copyright 2022 by RAM Rating Services Berhad
Ratings on Telekosang Hydro One Sdn Bhd