RAM Ratings places ratings of Telekosang Hydro One

Published on 11 Sep 2024.

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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 (2019/2037) and RM120 mil ASEAN Green Junior Bond (2019/2039) on Rating Watch with a negative outlook. TH1 owns and operates a 24 MW small hydro power plant (Plant 1) in Tenom, Sabah, while its sister company, Telekosang Hydro Two Sdn Bhd (TH2) owns and operates another 16 MW plant (Plant 2) at the same site. 

Since our last market update in July 2024 on the unexpected outages at both plants, the transaction’s liquidity position has further deteriorated, prompting this Rating Watch. In addition to revenue losses from plant downtime (since April 2024), the extent of external financial assistance to restore the transaction’s required liquidity threshold under the current ratings remains uncertain at this juncture. Under RAM’s sensitivity, the issue ratings may potentially face a multi-notch downgrade, which could materialise by the next payment date on 6 February 2025. 

The transaction’s cash balances as of 4 September 2024 stood at RM22.6 mil, sufficient to meet the RM11.9 mil interest payment on said date, but not the minimum FSRA requirement of RM31.7 mil, without crystallization of the RM12.5mil bank guarantee (recently extended to 7 September 2025) and shareholder support. Under this scenario, the transaction’s FSCR profile is expected to fall to 1.33 times, triggering a rating downgrade. We understand that the Issuer is seeking consent from the Sukukholders to grant an extension to meet the minimum FSRA requirement scheduled on 6 February 2025. Management is also looking into various options to reinstate the transaction’s liquidity position, but a definitive plan is only expected to be forthcoming over the next few months.  

Plant 1 is now fully back online since mid-August 2024 after a 3-month outage of one of the two units. However, Plant 2 remains offline, with one generating unit down since early April and the other since early May. Both units of Plant 2 suffered generator flashovers due to damaged stators. Management now expects Plant 2 to resume operations only in December 2024, a further delay of two months from our earlier update. Assuming full restoration by end-December 2024, the transaction will face an estimated cumulative revenue loss of around RM22 mil from RAM’s earlier estimate of RM18 mil. TH1 and TH2 may also face penalties for potentially failing to deliver at least 70% of the declared annual availability (or plant factor of 49%) under the respective renewable energy power purchase agreements (REPPAs).

In our assessment, we did not give any benefit to the recovery of the performance bond sought by TH1 and TH2 (on 22 August 2024) which is now pending court’s ruling on the injunction filed by the engineering, procurement, construction and commissioning (EPCC) contractor and any potential liquidated damages as well as insurance claims. At this juncture, it is critical for the Issuer to procure definitive plans to address the transaction’s liquidity issues and maintain the required debt coverages supportive of the present rating. In the past, the Sponsor – Jentayu Capital Sdn Bhd had provided financial support through various cash injections (totaling RM37 mil to date) into TH1 to maintain its liquidity position. On 23 August 2024, TH1 and TH2 terminated their respective EPCC contracts with the EPCC contractor – Sinohydro Corporation (M) Sdn Bhd and Power Construction Corporation of China, Limited.

We expect the Rating Watch to be resolved within the next five months, pending confirmation of the Sponsor’s liquidity plans. We will continue to monitor developments closely and make necessary updates when definitive 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

Media contact
Sakinah Arifin
(603) 3385 2500
sakinah@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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Ratings on Telekosang Hydro One Sdn Bhd