RAM Ratings assigns preliminary AA3 rating to RP Hydro’s proposed sukuk of up to RM975 mil

Published on 21 Feb 2023.

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RAM Ratings has assigned a preliminary AA3/Stable rating to RP Hydro (Kelantan) Sdn Bhd’s (RPHK or the Issuer) proposed ASEAN Green SRI Sukuk under the Shariah principle of Wakalah Bi Al-Istithmar of up to RM975 mil (2023/2046) (the Proposed Sukuk). The rating considers an issuance size of RM960 mil.

RPHK is wholly owned by Rising Promenade Sdn Bhd. The Proposed Sukuk issuance will be conditional upon the acquisition of 70% of RPHK’s ordinary shares by Malakoff Corporation Berhad (MCB) via its wholly owned subsidiary, Tuah Utama Sdn Bhd (collectively referred to as the MCB Sponsors), and the MCB Sponsors’ subscription to 100% of RPHK’s redeemable preference shares (RPS). The RPS subscription represents MCB’s proportionate equity contribution to RPHK.

Figure 1: Key parties to projects underlying the Proposed Sukuk

Key project documents consist of renewable energy power purchase agreements (REPPAs), the engineering, procurement, construction
and commissioning contract (EPCC Contract), operations and maintenance agreement (OMA) and technical service agreement (TSA).

The Issuer inked three 21-year REPPAs with Tenaga Nasional Berhad (TNB), the sole offtaker for the generation and sale of electricity from three small run-of-river hydropower plants. The three plants are located in the districts of Kuala Krai and Gua Musang, Kelantan, with an aggregate installed capacity of 84 MW (the Plants or the Projects). The three plant sites will be in Kuala Geris (25 MW), Kemubu (29 MW) and Serasa (30 MW), situated along Sungai Galas. The scheduled completion date for the Plants is 15 December 2025. A request for an extension of time may be required as the EPCC Contract estimates a construction period of 36 months.

The preliminary rating reflects the Issuer’s sturdy project fundamentals, underscored by favourable REPPA terms and low offtake risk. The Plants enjoy priority of dispatch from TNB (whose debt facilities are rated AAA/Stable/P1), which counterbalances the absence of fixed availability-based revenue. Proven technology and standard equipment warranties extended by reputable manufacturers, coupled with unsophisticated plant operations (backed by technical support from original equipment supplier, Andritz Sdn Bhd, in the initial operating years), anchor the transaction’s steady operating cashflow post-completion. 

The Plants’ exposure to construction risk in a location that is susceptible to monsoons is a key moderating factor to the rating. The Plants’ design is based on a 1 in 1,000 flood return period to address high flooding frequency in Kelantan. The construction of low-head hydropower plants is deemed less complicated compared to high-head plants, as the project site is on flatter terrain, easily accessible and concentrated in one location. Key challenges lie in river diversion to construct coffer dams and navigate monsoon and flood periods. Additionally, the lingering effects of Covid-19 may contribute to manpower shortages. These risks are somewhat addressed by the engagement of experienced EPCC Contractors under a fixed-priced, lumpsum turnkey contract and the Projects’ satisfactory cost contingencies (5.0% of contract sum), along with standard insurance coverage. 

The MCB Sponsors will provide additional liquidity support in the form of standby letters of credit (SBLC) for the equity portion of the Projects (Shareholders' Funds SBLC) and the RM30.8 mil contingency sum (with another RM15.0 mil of contingency amount to be prefunded via cash). A separate SBLC may be procured to meet the minimum required balance in the Finance Service Reserve Account to minimise cash retention in the transaction structure. While the MCB Sponsors may reimburse SBLC fees (except for Shareholders’ Funds SBLC) from the Projects’ cashflow, subject to distribution covenants, the SBLC providers will have recourse only to the MCB Sponsors.

Our stressed cashflow projection assumes a 12-month construction delay (additional 9 months from base) for all three plants, lower energy output at the 90th percentile based on 25 years’ river flow data at the project site and heftier operating expenditure. The minimum finance service coverage ratio (FSCR) (with cash balances, post-distribution) of 1.65 times (base case: 1.77 times) is commensurate with an AA3 risk profile. As the debt repayment profile is well matched against projected cashflow generation, the minimum FSCR without cash balances mostly exceeds 1.0 time (except for three payment periods). This indicates minimal reliance on brought-forward cash balances to meet sukuk obligations. RPHK’s robust debt coverage metrics are backed by our expectation that it will adhere to a post-distribution FSCR of at least 1.65 times throughout the Proposed Sukuk’s tenure. 


Analytical contacts
L Nurisya Abdullah
(603) 3385 2492

Chong Van Nee, CFA
(603) 3385 2482


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