Published on 02 May 2023.
RAM Ratings has affirmed the AA3 rating of Telekosang Hydro One Sdn Bhd’s (TH1 or the Issuer) RM470 mil ASEAN Green SRI Sukuk (2019/2037) (the Senior Sukuk) and the A2 rating of its RM120 mil ASEAN Green Junior Bonds (2019/2039) (the Junior Bonds). Both ratings have a negative outlook.
The negative outlook continues to reflect our ongoing concerns over residual completion risks for the 16 MW small hydro power plant (Plant 2) held under the Issuer’s sister company, Telekosang Hydro Two Sdn Bhd (TH2). This is despite TH1’s 24 MW small hydro power plant (Plant 1) recently reaching the feed-in-tariff commencement date (FiT CD). Combined cashflow generation from TH1 and TH2 (collectively, the Group) supports the repayment of the Senior Sukuk and Junior Bonds, which were issued to finance the development of both plants. The Plants are located in Tenom, Sabah.
Plant 2 is in the midst of finishing the necessary internal testing as all critical physical construction works are complete. Further testing and commissioning activities involving Sabah Electricity Sdn Bhd will be required before Plant 2 can reach the FiT CD. We have assumed a FiT CD of end-August 2023 against management’s target by mid-May 2023 to factor in further unexpected delays from the commissioning process and unfavourable weather conditions.
Nonetheless, the transaction’s credit strength remains intact as any cashflow lost from the delayed operations of both plants is bolstered by various liquidity sources procured by Jentayu Capital Sdn Bhd (the Issuer’s ultimate controlling shareholder and the transaction’s sponsor) and delayed liquidity damages (LDs) to be received from Sinohydro Corporation (M) Sdn Bhd and Power Construction Corporation of China, Limited (the engineering, procurement, construction and commissioning contractor (EPCC contractor)). These include RM11.96 mil of cash injections from the sponsor and a RM12.5 mil bank guarantee (BG) from MIDF Amanah Investment Bank Berhad.
In addition to an earlier RM27.5 mil retained contractual sum, the EPCC contractor has agreed to allow TH1 and TH2 to withhold another RM9.7 mil of remaining contractual payments to meet the Issuer’s financing obligations, pending the finalisation of anticipated delay LDs for Plant 1. Estimated delay LDs of at least RM22.5 mil should be forthcoming by August 2023. Payment risk from the EPCC contractor is further mitigated by performance bonds to the tune of RM45 mil. Given the payment certainty, RAM’s sensitised scenario takes the LDs into account. Accordingly, the Issuer’s minimum finance service coverage ratio (FSCR) over the sukuk tenure is expected to come in at 1.95 times, comfortably above the minimum 1.65 times required.
In the unlikely event that LDs are renegotiated or delayed beyond August 2023, we expect the Issuer to draw on the BG to meet the minimum Finance Service Reserve Account balance required to meet sukuk obligations due in February 2024. We caution that further delays beyond our stress assumptions in the completion of Plant 2 could necessitate additional funding, which is uncertain, and will warrant a reassessment of the ratings.
Since achieving commercial operations on 15 February 2023, Plant 1’s performance has been favourable, with a plant factor of 91%. A tripping issue caused by a fallen tree over the power line in March 2023 was rectified swiftly.
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 repayments starting only after the Senior Sukuk is fully redeemed in August 2038 and August 2039.
Wong Ee Loo
(603) 3385 2521
Chong Van Nee, CFA
(603) 3385 2482
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Ratings on Telekosang Hydro One Sdn Bhd