RAM Ratings has reaffirmed the AA3/Stable rating of Telekosang Hydro One Sdn Bhd's (TH1) RM470 mil ASEAN Green SRI Sukuk under the Shariah principle of Wakalah Bi Al-Istithmar (2019/2037) (Senior Sukuk). Concurrently, the A2/Stable rating of TH1's RM120 mil ASEAN Green Junior Bonds (2019/2039) (Junior Bonds) has also been reaffirmed.
The Project Companies (comprising TH1 and Telekosang Hydro Two Sdn Bhd (TH2)) have each signed 21-year Renewable Energy Power Purchase Agreements (REPPAs) with Sabah Electricity Sdn Bhd (SESB), in relation to two small hydropower plants with a combined installed capacity of 40 MW in Tenom, Sabah (the Project). The Scheduled Feed-in Tariff Commencement Date (FiT CD) for the Project is 31 July 2021, with a 24-month construction period. While TH1 is the issuer of both the Senior Sukuk and the Junior Bonds, the Project Companies are joint signatories to the relevant financing agreements, thereby ensuring their due performance in supporting TH1's financing obligations.
As at end-February 2020, the construction progress of both TH1's and TH2's plants were on track, with physical construction completion of 58.09% and 58.69%, respectively (vs scheduled construction completion of 53.94% and 54.12%). The construction of the plants is led by Sinohydro Corporation (M) Sdn Bhd and its ultimate holding company, Power Construction Corporation of China, Ltd (Power China). While the extensive experience of the Power China Group, a state-owned entity, would help minimise construction challenges, RAM remains cautious that unforeseeable disruptions brought about by the deepening Covid-19 pandemic could negatively impact the Projects' completion target. RAM's sensitised cashflow analysis has imputed a three-month delay, extending the completion date to 31 October 2021. Telekosang's projected liquidity and financial metrics remain intact under such a scenario.
Backed by favourable project fundamentals and the management's expertise in hydro power6ion, Telekosang is expected to display a robust cashflow debt coverage profile after the plants' completion. Under RAM's stressed case scenario, the Senior Sukuk is expected to record minimum and average annual finance service coverage ratios (FSCRs) (with cash balances) of 1.72 times and 2.58 times. RAM's sensitised cashflows have assumed a plant factor of 75% for both plants, which reflects weighted flow rates of 15.51m3/s (TH1) and 11.95m3/s (TH2) against an average flow rate of 35.2m3/s recorded at Telekosang's river site since December 2017.
The rating is further backed by the favourable terms of the REPPAs which accord priority of dispatch to the Project Companies, alleviating demand risk. Additionally, the engagement of Global Elite O&M Sdn Bhd a joint-venture company of the original equipment manufacturer (Global Hydro Energy Gmbh Austria) as the operations and maintenance (O&M) operator via a 16-year O&M Agreement indicates a strong alignment of interests that is favourable to the Projects. Post completion, the major uncertainty for Telekosang stems from difficulties in forecasting long-term rainfall patterns and river flow, which determine the hydropower plants' ability to generate power. Future developments surrounding the catchment area or climate change in the long run could also alter hydrological conditions.
Meanwhile, the rating of TH1's Junior Bonds is notched down from the Senior Sukuk, premised on their strong equity-like features and deep subordination to the latter in terms of cashflow priority. Furthermore, the Junior Bonds will be supported by a minimum annual FSCR (with cash balances) of 1.45 times during their tenure, which is commensurate with the benchmark FSCR for an A2 rating. The Junior Bonds have been structured as zero-coupon bonds, with repayment only starting after the full redemption of the Senior Sukuk, i.e. in August 2038 and August 2039.
Yip Chee Meng
(603) 3385 2516
(603) 3385 2577
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