RAM Ratings reaffirms AA1 rating of Sarawak Energy's sukuk

Published on 06 August 2013

RAM Ratings has reaffirmed the AA1 long-term rating of Sarawak Energy Berhad’s (“SEB” or “the Group”) Sukuk Musyarakah Programme of up to RM15 billion (2011/2036), with a stable outlook. SEB is a vertically-integrated electricity provider with a monopoly over the transmission and distribution of electricity while owning 57% of the current generating capacity in Sarawak. It is wholly-owned by the Sarawak State Government (“the State”).
The rating reflects SEB’s strategic role as the State’s electricity provider and a key facilitator of the Sarawak Corridor of Renewable Energy (“SCORE”), as well as the strong implicit State support given SEB’s critical role in the functioning of the State. Although there is no guarantee that obligates the State to support SEB, SEB is perceived to benefit from a “very high” likelihood of extraordinary support from the State in the event of financial distress, based on our rating methodology for government-linked entities. 
The rating is, however, moderated by the Group’s weak balance sheet and debt-servicing ability. In line the Group’s hefty debt-funded capital expenditure programme to fulfill its SCORE ambitions, the Group’s debt load broadened to RM6.28 billion as at end-2012 (end-2011: RM3.95 billion). Consequently, SEB’s adjusted gearing ratio came in at an aggressive 3.70 times while its adjusted fund from operations debt coverage was weak at 0.06 times as at end-2012. In the near to medium term, its balance sheet and cashflow coverage are envisaged to remain at around this level.
SEB remains exposed to demand risk, given the progressive take-up of power by SCORE customers against immediate capacity expansion in the near term with the Bakun (2,400 MW) and Murum (944 MW) hydro plants coming onstream. Although some of the overcapacity has been met by demand from firm SCORE and export customers for a total 1,820 MW of combined capacity to date, it is crucial that SEB constantly secure new customers for the remaining capacity. Customer-concentration risk is also present as SCORE off-takers create a certain lumpiness in demand growth. While these risks are moderated to some extent by the terms of SEB’s agreements with its clients as well as the Group’s diverse clientele, it is still vulnerable to economic down-cycles since the majority of its customers are from the manufacturing industry.
Elsewhere, SEB is inherently exposed to power-supply concentration risk as about 43% of its current power supply emanates from the Bakun plant, which is owned by the Federal Government (via Sarawak Hidro Sdn Bhd). Reliance on Bakun is expected to be moderated when the 944 MW Murum hydro power plant comes onstream in 2014. All said, any major interruption of power supply – as evidenced by the recent major power blackout across Sarawak at end-June 2013 - could undermine the State’s system security and may pose a challenge for SEB in its negotiations with potential SCORE customers.
Media contact
Jocelyn Chiang
(603) 7628 1124
jocelyn@ram.com.my