MARC AFFIRMS ITS AAAIS(bg) and AAAIS(fg) RATINGS ON RANHILL POWER SDN BHD’S RM800 MILLION SUKUK MUSHARAKAH FACILITY

Jul 16, 2013 -

MARC has affirmed its AAAIS(bg) and AAAIS(fg) ratings on Ranhill Power Sdn Bhd’s (RPSB) RM300 million bank guaranteed (Tranche 1) and RM500 million Danajamin Nasional Bhd (Danajamin) guaranteed (Tranche 2) Sukuk Musharakah facilities respectively. The outlook for both ratings is maintained at stable.

The rating on Tranche 1 reflects the credit strength of an unconditional and irrevocable guarantee provided by Maybank Islamic Berhad (MIB), which carries a MARC rating of AAA/stable. The rating on Tranche 2 reflects the credit strength of an unconditional and irrevocable Kafalah Guarantee provided by Danajamin. MARC currently maintains an insurer financial strength rating of AAA/stable on Danajamin.

RPSB was part of the Ranhill Berhad (RB) group of companies and an intermediate holding company for the group’s power generation subsidiaries. Following a corporate restructuring exercise, RB’s interests in its water and oil & gas engineering subsidiaries have been disposed to RPSB. Post-restructuring, RPSB has become an indirect wholly-owned subsidiary of a newly incorporated holding company, Ranhill Energy and Resources Berhad (Ranhill), which is expected to be listed on the main board of Bursa Malaysia Securities on July 31, 2013. MARC also notes that a key result of the restructuring exercise is that water service provider SAJ Holdings Sdn Bhd (SAJH) has become an 80%-owned indirect subsidiary of RPSB. MARC views the internal reorganisation exercise to have no bearing on the issue structure, terms and conditions of RPSB’s RM800 million rated sukuk; dividend contributions mainly from water subsidiary SAJH and the power generation subsidiaries, Ranhill Powertron Sdn Bhd (RPI) and Ranhill Powertron II Sdn Bhd (RPII), remain the source of repayment for the sukuk.

On a standalone basis, MARC views the sukuk to have moderate credit risk given the fairly predictable earnings stream of the water supply and distribution business of SAJH and power generation operations of RPI and RPII. SAJH, which leases water assets from Pengurusan Asset Air Bhd under a facility agreement, is an integrated water service provider in Johor. The company continues to be exposed to regulatory risks with the renewal of its three-year operating licence dependent on meeting the key performance indicators (KPI) set by the regulators. MARC notes that SAJH’s operating licence has been renewed until December 2014. For financial year ending December 31, 2012 (FY2012), SAJH registered a 10.1% and 39.1% year-on-year increase in revenue and operating profit to RM763.8 million and RM152.5 million respectively. SAJH upstreamed dividends of RM88 million to RB in FY2012 (18MFY2011: RM106 million), which is higher than management’s estimate of RM84 million for the year. MARC expects SAJH’s performance in the near term to benefit from lower dependence on purchased treated water after it secured the right of use from July 2012 onwards, over the water assets of one of the two companies from which it purchased treated water.

RPSB is the largest independent power producer in Sabah; its total generating capacity of 380 MW accounts for 57.6% of the state’s total installed power capacity. MARC observes that the favourable long-term offtake arrangements of RPI and RPII secured with Sabah Electricity Sdn Bhd (SESB), an 80%-held subsidiary of Tenaga Nasional Bhd, insulate RPSB from demand risk. In FY2012, the power plants operated by RPI and RPII experienced scheduled and unscheduled outages which have since been rectified. For FY2012, RPI upstreamed dividends of RM12.0 million while RPII remains restricted by its debt covenants from upstreaming dividends until end-June 2013. In addition, the agency expects the dividend upstreaming capabilities of RPI to increase should the proposal to early redeem RPI’s outstanding RM540 million Islamic Medium Term Notes (IMTN) from part proceeds from Ranhill’s listing exercise be completed.  

At the holding company level, RPSB’s revenue, which comprises mainly dividends from subsidiaries, increased to RM12.9 million in FY2012 (18MFY2011: RM4.2 million) due largely to the RM12.0 million dividend contribution from RPI. Cash flow from operations (CFO) and cash balances remain weak at negative RM1.4 million and RM0.4 million respectively in FY2012 (18MFY2011: negative RM26.6 million; RM0.3 million). RPSB’s future revenue is expected to increase as other operating subsidiaries have been added post corporate restructuring. RPSB has met the first principal payment of RM5 million on May 31, 2013 on its RM800 million rated sukuk. The next repayment of RM10 million under the rated sukuk is due on June 2, 2014.

Sukukholders are insulated from any downside risks related to the credit profile of RPSB by the guarantees provided by MIB and Danajamin. Any change in the supported ratings or rating outlook would be primarily driven by changes in the credit strength of the guarantors.

Contacts:

Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my;

Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.