RAM Ratings reaffirms AAA(bg) rating of Musteq Hydro’s sukuk

Published on 21 December 2012

RAM Ratings has reaffirmed the enhanced long-term rating of AAA(bg) for Musteq Hydro Sdn Bhd’s (“Musteq Hydro” or “the Company”) Bank-Guaranteed Sukuk Musharakah of up to RM80 million in nominal value (2012/2022) (“the Sukuk”), with a stable outlook. The enhanced rating reflects the credit strength of the unconditional and irrevocable bank guarantee (“BG Facility”) provided by Maybank Islamic Berhad, which carries respective long- and short-term financial institution ratings of AAA and P1 by RAM Ratings. Musteq Hydro is an independent power producer (“IPP”) that owns and operates a 20-MW hydro power plant at Sungai Kenerong, Kelantan (“the Plant”), under a Power Purchase Agreement (“PPA”) with Tenaga Nasional Berhad (“TNB”) that will expire on 19 December 2030. 

Unlike other IPPs, Musteq Hydro’s PPA with TNB does not entitle the Company to fixed capacity payments. Instead, the Company only earns energy payments that are based solely on the Plant’s despatch levels, therefore rendering its earnings less predictable. This is made more pronounced by the Plant’s operating technology that is dependent on river flow to generate electricity. Furthermore, although TNB is obligated to purchase and accept all the electrical energy produced and delivered by Musteq Hydro, the utility giant reserves the right to reject the Plant’s output should its transmission and distribution system experience an emergency situation or require maintenance. Like other IPPs, the rating also remains moderated by regulatory and single-project risks.

For the first 10 months of 2012, Musteq Hydro only achieved a 58.90% capacity factor against its long-term average capacity factor of 64%. The lower capacity factor is attributable to major overhauls and unforeseen repairs and restoration works for the transmission lines within the Plant as well as its turbines. Although fully rectified in September 2012, these incidents had taken a toll on the Plant’s electricity output.  

Based on RAM Ratings’ cashflow analysis, which assumes, amongst others, an annual capacity factor of 60%, Musteq Hydro’s sensitised annual pre-financing cashflow is projected to average at RM12 million throughout the tenure of the Sukuk. This translates into a moderate level of debt-servicing ability, with a finance service coverage ratio (with cash balances, post-distribution, calculated on annual principal-repayment dates) of at least 1.25 times. In assessing Musteq Hydro’s annual distributions to its shareholders, our sensitised cashflow analysis assumes that the Company will adhere to its financial covenants throughout the tenure of the Sukuk (i.e. on a forward-looking basis, as opposed to only the year of assessment).

Media contact

Jocelyn Chiang

(603) 7628 1124

jocelyn@ram.com.my