RAM Ratings lifts Rating Watch, reaffirms ratings of Telekosang Hydro One’s Senior Sukuk and Junior Bonds with negative outlook

Published on 15 Sep 2022.

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RAM Ratings has lifted the Negative Rating Watch on 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). Concurrently, we have reaffirmed the ratings of the Senior Sukuk and Junior Bonds at AA3 and A2, respectively, with a negative outlook. 

Combined cashflow generation from 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) supports the repayment of the Issuer’s Senior Sukuk and Junior Bonds. Both plants (the Projects) are located in Tenom, Sabah.

The reaffirmation of the ratings is premised on the successful execution of two Supplemental Agreements to the Engineering, Procurement, Construction and Commissioning (EPCC) Contracts with Sinohydro Corporation (M) Sdn Bhd and Power Construction Corporation of China, Limited (the EPCC contractor) for the Group to withhold a portion of remaining contractual payments payable to the EPCC contractor, as well as the extension of TH1’s existing bank guarantee facility from MIDF Amanah Investment Bank up to September 2024. Assuming the completion of the Projects by end-December 2022, in line with the extension of time obtained from Sustainable Energy Development Authority Malaysia, the combined additional liquidity of RM40 mil from these plans will help reinstate the Group’s liquidity position to a level commensurate with TH1’s issue ratings. 

In consideration of the withheld amounts, the Supplemental Agreements signify full settlement of all claims between the parties, including liquidated damages previously owed by the EPCC contractor to TH1 and TH2, and any potential cost overrun from the Projects. The withheld sum can be released to the EPCC contractor only after the fulfilment of TH1’s financial covenants, which is unlikely in the medium term under our stress analysis. 

The outlook of the ratings has been revised to negative as RAM believes that the Projects may still subject to further delays beyond end-December 2022, especially Plant 2, attributable to the possibility of unforeseen interruptions from climate- and Covid-19-related events as well as the challenges of coordinating the availability of Sabah Electricity Sdn Bhd (SESB) personnel to complete all necessary testing and commissioning activities. Notwithstanding sufficient liquidity support, protracted delays, especially in completing Plant 2, could lead to additional funding needs and trigger downward rating actions. RAM will continue to closely monitor the progress of the Projects and reassess the impact accordingly upon completion. 

Under the Supplemental Agreements, the EPCC contractor targets the completion of Plant 1 by mid-September 2022 and Plant 2 by end-November 2022. As of mid-August 2022, the plants were inching towards completion, with construction progress standing at 99.3% and 97.8%, respectively (April 2022: 97.7% and 95.7%). As Plant 1 had missed the revised finish date due to coordination issues with SESB, we believe it should be completed ahead of end-December 2022. Should Plant 1 become operational earlier than expected, the resulting cashflow generation could help cushion potential liquidity shortfall from delays in completing Plant 2. 

The rating of the Junior Bonds is notched down from the Senior Sukuk’s 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 repayment commencing only after full redemption of the Senior Sukuk.


Analytical contacts
Wong Ee Loo
(603) 3385 2521

Chong Van Nee, CFA
(603) 3385 2482


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.

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Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
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Ratings on Telekosang Hydro One Sdn Bhd