RAM Ratings has reaffirmed the AA3/Stable rating of Tanjung Bin Energy Issuer Berhad's (TBE Issuer) MYR 3.29 billion Sukuk Murabahah. TBE Issuer – a wholly-owned subsidiary of Tanjung Bin Energy Sdn Bhd (TBE) – is the turnkey contractor that will develop, construct and finance TBE's super-critical 1,000-MW coal-fired power plant in Tanjung Bin, Johor (the Plant).
"TBE Issuer's financial commitments will be supported by back-to-back payments from TBE. In this regard, we recognise the strong credit link between these entities and view them in aggregate from a credit standpoint.
"The construction of the Plant was 10 per cent behind schedule as at end-March 2014 (59 per cent complete) due to unexpected subsoil conditions. Subsequently, the engineering, procurement and construction (EPC) contractors submitted considerable claims for expenditure incurred, although these claims have been rejected by TBE Issuer. We will closely monitor developments on this front. Barring further unforeseen circumstances, we have imputed these in our cashflow assessment which indicates that our assumed contingency sum and some potential cost savings are able to cushion such claims for the time being.
"While we understand that the EPC contractors will still strive to meet the scheduled commercial operating date (SCOD) of 1 March 2016 by implementing extensive measures to expedite construction, the commercial operating date (COD) could potentially be delayed should progress not pick up significantly. That said, we recognise the close to two year lead time available and concur with TBE Issuer that it remains too early to assess the outcome of remediation works. We will review the rating by end-2014. Further deterioration in the progress of construction or unexpected cost overruns will exert downward pressure on the rating. We believe that TBE's sponsor – Malakoff Corporation Berhad – will be strongly committed to ensuring the Plant's completion, supported by its long-standing presence and track record in the power industry and its long-term ownership of its independent power producers (IPPs).
"The rating reflects TBE's sturdy project fundamentals, underscored by the favourable terms of its Power Purchase Agreement with Tenaga Nasional Berhad, its sole off-taker. Upon completion of the Plant, the Group is envisaged to possess a strong debt-servicing aptitude, with a minimum finance service coverage ratio on payment dates (with cash balances, post-distribution) of 1.50 times, supported by its strong cashflow generating ability and well-matched debt obligations. In arriving at the ratio, the Group is expected to consistently procure the required standby letter of credit to fund its finance service reserve account, while we are cognisant of the implementation of the Single Counterparty Exposure Limit (SCEL) policy published by Bank Negara Malaysia. Furthermore, we expect the Group to adhere to its financial covenants throughout the Sukuk's tenure on a forward-looking basis, rather than only in the year of assessment.
"The amortisation profile of TBE Issuer's Senior Facilities with three lumpy principal repayments exposes the Group to potential changes in financial guidelines, and market, interest-rate and credit-spread risks. In this regard, the SCEL policy may heighten the refinancing risk that the Group faces, although we note the project's cashflow for the remaining tenure of the PPA is sufficient to cover its total outstanding debt at each point of refinancing."