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RAM Ratings places ratings of Telekosang Hydro One’s Senior Sukuk and Junior Bonds on Negative Rating Watch
Published on 07 Aug 2023.
RAM Ratings has placed the respective AA3/Negative and A2/Negative 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) (Senior Sukuk) and RM120 mil ASEAN Green Junior Bonds (2019/2039) (Junior Bonds) on Rating Watch with a negative outlook.
The rating action highlights our concerns over the Issuer’s deteriorating liquidity position and potential breaches in meeting the covenanted minimum finance service reserve account (FSRA) balances over the next few years (the immediate trigger being the next payment date of February 2024). This was resulted from continued uncertainties in the timing of liquidated damages (LDs) owed by Sinohydro Corporation (M) Sdn Bhd and Power Construction Corporation of China, Limited (the engineering, procurement, construction and commissioning (EPCC) contractor) and the protracted completion of the 16 MW plant under Telekosang Hydro Two Sdn Bhd.
The LDs, initially anticipated to be received by early-August 2023, were deferred due to scheduling conflict challenges faced by the EPCC contractors’ key personnel in finalising the issuance of the certificate of completion for TH1’s 24 MW small hydro power plant (Plant 1). Plant 1 has been operating commercially since mid-February 2023 (against the revised completion date of September 2022 guaranteed by the EPCC contractors). The feed-in tariff commencement date (FiT CD) of the 16 MW plant (Plant 2), meanwhile, has been delayed to November 2023 (from our previous expectation of end-August 2023) by an unexpected mudslide which damaged part of the transmission lines.
Contrary to our earlier expectations, however, remaining contractual payments of RM9.7 million currently retained by the Issuer are now likely to be offset against the LDs owed by the EPCC contractor. This leaves the transaction’s overall available liquidity lower than previously anticipated. The transaction presently remains supported by a RM12.5 mil bank guarantee (BG) for any FSRA shortfall. Estimated LDs of at least RM25 mil (after netting off the abovementioned remaining contractual sum) due from the EPCC contractors are backed by performance bonds to the tune of RM45 mil.
Persistent hold-ups in settling and receiving the LDs of at least RM25 mil will result in multiple FSRA shortfalls over the next three years, lowering its FSCR to below the 1.65 times AA3 rating threshold, triggering a downward rating action to the Senior Sukuk and Junior Bonds ratings. This is under the assumption that Plant 2 reaches the FiT CD by end-December 2023. Delays beyond this date will further pressure the transaction’s liquidity position.
On 7 August 2023, closing balances in TH1’s FSRA stood at RM263,951 against the required minimum amount of RM12.48 mil covenanted under the transaction documents. The Issuer has total cash balances of RM14.31 mil following Sabah Electricity Sdn Bhd’s recent payment for electricity generated by Plant 1 since commercial operation. The unexpected payment delay was due to coordination issues with Sustainably Energy Development Authority Malaysia to issue a confirmation letter with regards to Plant 1’s FiT CD in mid-February 2023 following key personnel changes. The Issuer is currently making the necessary transfer to the FSRA to comply with the minimum required balance within the remedy period ending on 1 September 2023.
We expect the Rating Watch to be resolved within the next three months, depending on the progress of relevant cash inflows. We will continue to monitor developments closely and make necessary updates when more details become available.
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.
Analytical contacts
Wong Ee Loo
(603) 3385 2521
eeloo@ram.com.my
Chong Van Nee, CFA
(603) 3385 2482
vannee@ram.com.my
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
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