RAM Ratings reaffirms AAA and AAA(s) ratings of Manjung Island Energy’s RM5 billion sukuk

Published on 10 December 2012

RAM Ratings has reaffirmed the respective AAA and AAA(s) ratings of Series 1 and Series 2 of Manjung Island Energy Berhad’s (“Manjung”) Islamic Securities Programme of up to RM5 billion (“Sukuk”); both long-term ratings have a stable outlook. The enhanced AAA(s) rating of Series 2 reflects the irrevocable and unconditional corporate guarantee from Tenaga Nasional Berhad (“TNB”), whose AAA (stable outlook) debt rating was reaffirmed by RAM Ratings in May 2012.

Manjung is a special-purpose vehicle set up to raise the financing required to meet the development cost of a new 1,000-MW coal-fired power plant under TNB Janamanjung Sdn Bhd (“TNBJ”). TNBJ currently operates a 2,100-MW coal-fired plant made up of three 700-MW generating units. Manjung Island will derive lease payments from TNBJ. In addition, the Sukuk holders’ recourse to TNBJ under the Ijarah structure is recognised via the Purchase Undertaking between Manjung and TNBJ. Acknowledging the strong credit link between Manjung and TNBJ, we view both companies in aggregate from a credit perspective. The ratings of Series 1 and 2 are therefore a reflection of the respective credit risks of TNBJ and TNB.

The reaffirmation of the ratings is premised on TNBJ’s strong business profile that is backed by the favourable terms of its Power Purchase Agreement (“PPA”) with TNB. TNBJ is entitled to earn full capacity payments (“CPs”) and qualifies for energy payments from TNB, subject to meeting certain performance requirements in the PPA. The existing plant is viewed to be strategically important to TNB, which has provided a perpetual standby letter of credit that covers the requirements of Manjung’s Finance Service Reserve Account and a letter of undertaking that covers up to RM300 million of construction cost overruns for the new plant.

Notably, Manjung’s financing structure isolates construction risk as the cashflow from TNBJ’s existing plant can amply service the obligations on Series 1. Based on our sensitivity analysis, TNBJ is expected to generate an average pre-financing cashflow of about RM600 million after the completion of the new plant until 2021. Thereafter, it is projected to be reduced to about RM200 million until the maturity of the Sukuk as the plant’s capacity rate financial will decline. These numbers are anticipated to translate into respective minimum and average Finance Service Coverage Ratios (with cash balances, post-distribution) of 2.00 and 6.03 times on the principal-repayment and profit-payment dates throughout the tenure of Series 1. RAM Ratings’ projections assume that Manjung will adhere to its financial covenants throughout the term of the Sukuk (i.e. on a forward-looking basis, as opposed to only the year of assessment). 

Meanwhile, TNBJ’s existing plant has been experiencing operational glitches over the past 5 years, leading to CP losses. However, the management’s concerted remedial actions had slashed the quantum of such losses by 60% between FY Aug 2011 (RM224.79 million) and the 11-month period ended 31 July 2012 (RM90 million). We highlight that TNBJ’s superior projected debt-coverage metrics incorporate rigorous sensitivities on CP losses and no fuel margins. Similar to all other independent power producers however, TNBJ is exposed to regulatory and single-project risks.

Media contact

Chinthamani Thanneermalai

(603) 7628 1013

chinthamani@ram.com.my