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

Published on 03 January 2014

RAM Ratings has reaffirmed the enhanced AAA(bg)/stable rating of Musteq Hydro Sdn Bhd’s (the Company) Bank-Guaranteed Sukuk Musharakah of up to RM80 million in nominal value (2012/2022). The enhanced rating reflects the credit strength of the bank guarantee provided by Maybank Islamic Berhad, which carries AAA/stable/P1 financial institution ratings by RAM. Musteq 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 (TNB) that will expire on 19 December 2030.

Unlike other IPPs, Musteq’s PPA with TNB does not entitle the Company to fixed capacity payments. Instead, Musteq only earns energy payments that are based solely on the Plant’s despatch levels, thereby rendering its earnings less predictable. This is accentuated by the Plant’s operating technology, which depends on rainfall. Furthermore, although TNB is obligated to purchase and accept all the electrical energy produced and delivered by Musteq, TNB reserves the right to reject the Plant’s output should the utility giant’s transmission and distribution system experience an emergency situation or require maintenance. Similar to other IPPs, the rating remains moderated by single-project and regulatory risks, albeit the latter risk being less pronounced for Musteq due to its small plant and less favourable PPA terms.

On its most recent principal repayment date of 26 January 2013, Musteq’s finance service cover ratio (FSCR) of 1.80 times (with cash balances, post-distribution and calculated over a 12-month period) had met our expectations. For the first 9 months of 2013, the IPP only achieved a 47% capacity factor against the 60% forecast earlier. This is attributable to major equipment breakdown, which, according to the Company will only be rectified by early 2014. Given the Plant’s recent poor operational performance, we have stressed our cashflow projections by assuming heftier capital and operating expenditure, along with a lower capacity factor for the Plant. Consequently, Musteq’s FSCR (calculated over a 12-month period on principal repayment dates) is projected to weaken to about 1.12-1.22 times over the next 3 years – a technical breach of the covenanted 1.25 times under the Trust Deed. Beyond that, its debt-servicing ability would be a concern as lumpy repayments will commence on 26 January 2017. Should our assumptions prove true, Musteq is expected to face a liquidity crunch then.

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Jocelyn Chiang

(603) 7628 1124

jocelyn@ram.com.my