RAM Ratings upgrades rating of Mukah Power’s Senior Sukuk

Published on 08 October 2013

RAM Ratings has upgraded the rating of Mukah Power Generation Sdn Bhd’s (Mukah Power or the Company) Senior Sukuk Mudharabah Programme of up to RM665 million (2006/2021), from AA3/stable/- to AA2(s)/stable/-. The enhanced AA2(s)/stable/- rating reflects our expectation of support for Mukah Power from the larger Sarawak Energy Berhad (Sarawak Energy) Group that the Company is a part of. Such support is underlined by a recent RM268 million equity injection by Sarawak Energy for early redemption of Mukah Power’s Junior Sukuk Mudharabah Programme of up to RM285 million (2006/2031) on 21 May 2013. This is further complemented by a strongly worded letter of support from Syarikat SESCO Berhad (SESCO, Sarawak’s state utility company and sister company of Mukah Power) on 21 August 2013.

The stand-alone issue rating of the Senior Sukuk continues to be supported by minimal demand risk given the terms of the PPA and its strong near-term debt coverage, which is expected to weaken in the long run. The Company is entitled to earn full capacity payments, irrespective of the quantum of electricity generated (subject to meeting certain performance requirements), as well as a partial guarantee on energy payments from SESCO.

Meanwhile, the stand-alone issue rating is moderated by Mukah Power’s increasing operations and maintenance (“O&M”) costs and single-project risk. The escalating O&M expenses are primarily driven by the rising routine maintenance costs resulting from unsatisfactory operational performance of the Plant, exacerbated by the absence of an O&M agreement. Mukah Power’s debt-servicing aptitude is expected to weaken over the long term, premised on the escalating O&M expenditure projected by the Company while coal cost is not anticipated to be fully passed through due to poor coal quality and low plant efficiency. Factoring these concerns into our sensitised cashflow model, the Company’s projected Senior Sukuk Coverage Ratio (with cash balances, post-distribution and calculated over a 12-month period on principal repayment dates) is expected to decline to a minimum of 1.19 times throughout the remaining tenure of the Senior Sukuk, although the coverage levels still remain strong at an average of 1.50 times over the next 4 years. RAM cautions that further significant increases in plant expenditure would weigh on Mukah Power’s cashflow metrics. In view of Mukah Power’s weaker cashflow in the future and based on the Company’s representation, our financial model assumes that it will not make any distributions or subordinated payments.

Mukah Power is an IPP incorporated to construct, own, operate and maintain a 270-MW coal-fired power plant in Mukah, Sarawak, for 25 years under a PPA with SESCO, expiring on 15 January 2034.

Media contact

Chin Wynn

(603) 7628 1170

chinwynn@ram.com.my