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RAM Ratings affirms AAA/Stable and AAA(s)/Stable of Manjung Island Energy’s Series 1 and Series 2 sukuk
Published on 24 Dec 2024.
RAM Ratings has affirmed the AAA/Stable rating of Manjung Island Energy Berhad’s (MIEB) RM3.86 bil Islamic Securities (2011/2030) (Series 1) and the enhanced AAA(s)/Stable rating of its RM990 mil Islamic Securities (2011/2031) (Series 2). Series 2’s enhanced rating reflects an irrevocable and unconditional corporate guarantee from Tenaga Nasional Berhad (TNB, sukuk rated AAA/Stable by RAM).
The affirmation of Series 1’s rating is premised on our expectation that TNB Janamanjung Sdn Bhd’s (TNBJ or the Company) debt servicing profile will remain intact despite the prolonged outage of one of its power plants - the 1,010 MW coal-fired power plant known as Generating Facility 2 (GF2 or Unit 4). GF2 was offline since 4 December 2023 due to damage sustained by the rotor and casing of its intermediate-pressure steam turbine. Repair works for Unit 4’s faulty turbine is complete and the unit recommenced operations on 5 November 2024, slightly ahead of TNBJ’s expectations.
MIEB is a special-purpose vehicle established to raise funding for the construction of GF2, which sits adjacent to TNBJ’s 2,070 MW Sultan Azlan Shah power plant in Perak (GF1) (collectively, the Plants). By virtue of a Purchase Undertaking between MIEB and TNBJ, RAM views both entities in aggregate from a credit perspective.
TNBJ obtained approval from TNB to place GF2 under planned outage for this incident, a key development since our review in June 2024. This allows the Company to be eligible for full available capacity payments (ACPs) between January 2024 and November 2024, in exchange, incurring an AT penalty of RM365 mil in 2028 instead. The arrangement alleviates our previous concerns of near-term cashflow pressure, where we now foresee TNBJ’s debt servicing metrices to improve and remain superior. This is despite GF2’s higher repair cost of RM202 mil against the previous estimate of RM132 mil.
Within our stressed analysis, we projected minimum finance service coverage ratio (FSCR, with cash balances) of 5.06 times throughout Series 1’s tenure assuming no distributions were made in the near-term as guided by the management. This compares favourably against the minimum FSCR (with cash balances) of 1.70 times projected in our June 2024 review, where we anticipated GF2 to only resume operations in February 2025.
The Company’s robust debt servicing metrices is largely held up by their cash coffers which stood strong at RM1.32 bil as at end-Nov 2024 aided by continued ACP receipts during GF2’s downtime, allowing them to comfortably meet RM176 mil of sukuk obligations due in 2025. Series 1 is backed by a 12-month standby letter of credit procured by TNB, TNBJ’s ultimate parent. Series 2 is structured with a RM990 mil bullet principal repayment on 25 November 2031 (after full redemption of Series 1). In any case, the Company will continue to preserve its cashflows to fully meet Series 2 repayments, as seen in the past.
As per the terms of its power purchase agreements (PPAs) with TNB for GF1 and GF2, the Company is entitled to full ACPs, subject to operating within PPA parameters, irrespective of the quantum of electricity generated. TNBJ also receives energy payments by way of a fuel cost pass-through mechanism. The Plant’s rolling unscheduled outage rates of GF1 continued to breach the PPA-stipulated limit of 6%, causing the Company to record RM32 mil of ACP losses in 8M FY Dec 2024 (4% of full ACPs). GF2 was not impacted as it is under approved scheduled outage for the same period. Meanwhile, continued operational setbacks and operating inefficiency prevented TNBJ from fully passing through fuel costs in 8M fiscal 2024.
With further revenue losses, lingering negative fuel margins along with the lumpy RM365 mil provision booked for the expected AT penalty, TNBJ continued to have a weak, albeit improved, financial showing in 8M fiscal 2024 as seen from its RM159 mil pre-tax loss (fiscal 2023: pre-tax loss RM622 mil). We expect TNBJ’s financial performance to turnaround in the next year with Unit 4 already back online, and when fuel margin further stabilises.
In RAM’s view, TNBJ remains exposed to regulatory and single-project risks, like other independent power producers. As coal-fired power plants are the focal point of the government’s carbon reduction policies, RAM is of the view that the Company may have to contend with tighter environmental regulations in the future. In the long term, coal plants will increasingly face challenges in obtaining financing or insurance support.
Analytical contacts
Chew Chiang Lim
(603) 3385 2516
chianglim@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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