MARC ASSIGNS PRELIMINARY RATING OF AA-IS TO MALAKOFF POWER BERHAD’S PROPOSED RM5.4 BILLION SUKUK MURABAHAH; AFFIRMS MARC-1IS RATING ON EXISTING ICP PROGRAMME; OUTLOOK STABLE

Nov 22, 2013 -

MARC has assigned a preliminary rating of AA-IS to Malakoff Power Berhad’s (MPower) proposed issuance of Sukuk Murabahah of up to RM5.4 billion. Concurrently, MARC has affirmed its short-term rating of MARC-1IS on MPower’s outstanding RM200 million Islamic commercial papers (ICP) due in April 2014 issued under its RM300.0 million ICP Programme. The ratings outlook is stable. Proceeds from the proposed Sukuk Murabahah will be mainly used to early redeem MPower’s outstanding RM4.9 billion Murabahah Securities Facility which was assigned a AA-IS/Stable rating by MARC on January 11, 2013.

The rating on the sukuk reflects the consolidated credit profile of MPower and parent Malakoff Corporation Berhad (Malakoff) to capture the strong credit linkages between the two entities. The linkages are achieved primarily as a result of cash flow dependencies between the parent and subsidiary as well as an explicit Kafalah guarantee extended by Malakoff for the proposed sukuk.

MPower is the operator of three independent gas-fired power plants as well as two independent coal-fired power generation facilities, one of which is under construction. Malakoff, meanwhile, is the leading developer of independent power plants in Malaysia with interests in a total of 5,020-megawatt (MW) of generating capacity, comprising six power stations which are in operation. The group’s second domestic coal power project which is wholly-owned by Malakoff, the 1,000MW coal-fired Tanjung Bin Energy (TBE) Power Station, is expected to commence commercial operations in March 2016.

The consolidated entity's fundamental credit strengths are the low business risks and relatively predictable cash flows generated by the group's five majority-owned power projects under long-term power purchase arrangements (PPA) with Tenaga Nasional Berhad (rated AAA/Stable). The PPAs lend predictability to the earnings, debt servicing and dividend distribution capacities of the power projects, as well as stability to MPower's operation and maintenance (O&M) revenues. The revenue stream securing the sukuk notably includes repayments on RM3.0 billion of loan stocks issued by four of its majority-owned domestic independent power producers (IPP). 

The base case consolidated cash flows of MPower and Malakoff  provide a fairly high level of coverage, with an average finance service coverage ratio (FSCR) of 2.85 times and minimum FSCR of 1.93  times. The stability of that coverage under numerous sensitivities is assessed by MARC to be good. Distribution to shareholders is restricted by FSCR tests under the proposed financing which should ensure cash remains in MPower and Malakoff in the later years when the capacity revenues of major cash flow contributor, Tanjung Bin Power Sdn Bhd (TBP), are projected to decline. Another structural feature reflected in the rating is the disposal proceeds account which captures proceeds from any dilution of shareholding in project companies by Malakoff and/or MPower and disposal of non-core assets by Malakoff for repayment of the sukuk.

Recognising the high reliance on cash flow generated by TBP for debt service and the recent operational issues at the coal-fired power project, MARC will continue to monitor the progress of ongoing initiatives which are expected to fully restore the plant's dispatch availability by February 2014. The rating agency notes that the base case cash flow projections have incorporated cash flow reductions of around RM250 million between 2013 and 2015 for the plant's lowered availability.

Key credit weaknesses include the consolidated entity's high debt leverage as measured by its debt-to-equity ratio of 3.65 times and the subordination of the sukuk to existing and future obligations of Malakoff's project companies. The lumpy nature of the consolidated entity's debt maturities in 2017 further poses refinancing risks. The group plans to raise additional equity or quasi-equity at the parent company and to take up additional borrowings at MPower in 2017 to fund repayments of slightly over RM1.5 billion of external debt taken to fund the group's more recent investments in the TBE power project and foreign assets. The resulting uncertainty regarding future funding leads MARC to perceive 2017 as a somewhat vulnerable point in the financing structure.

Apart from the refinancing risks associated with a partially drawn equity bridging loan of RM1.3 billion to Tanjung Bin Energy Sdn Bhd, the consolidated entity is also exposed to construction delay and cost overrun risks in respect of the TBE power project which is currently under construction. 

The stable outlook anticipates the completion of an initial public offering (IPO) by Malakoff by the first half of 2014. Through its planned re-listing on Bursa Malaysia, the parent expects to raise equity proceeds of RM1.95 billion to fund the early redemption of the parent's callable RM1.8 billion unrated Junior Sukuk. MARC views the completion of the IPO as key to improving the group's overall capital structure and believes that the associated execution risks are manageable. 

Also reflected in the stable outlook and assigned rating is MARC's expectation that sukukholders' exposure to operational risks at TBP will be significantly reduced post-completion of the plant turnaround initiatives. For this reason, unfavourable developments in the plant's turnaround progress will have negative rating implications. MARC notes that TBP is expected to provide around 40% of the consolidated cash flow of MPower and Malakoff over the sukuk's tenure.

The rating is sensitive to any material change in the credit profile of either MPower or its parent.

Contacts:

Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;

Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my;

David Lee, +603-2082 2255/ david@marc.com.my.