MARC AFFIRMS AA-IS RATING ON TANJUNG BIN O&M BERHAD'S RM470.0 MILLION ISLAMIC SECURITIES

MARC has affirmed its AA-_IS rating on Tanjung Bin O&M Berhad’s (Tanjung Bin O&M) RM470.0 million Islamic Securities (Sukuk Wakalah) with a stable outlook. Tanjung Bin O&M is the operations and maintenance (O&M) provider of the 2,100-megawatt (MW) coal-fired power plant owned by related company Tanjung Bin Power Sdn Bhd (TBP) under the O&M agreement (OMA). Tanjung Bin O&M has transferred key operational obligations under the OMA to parent company Malakoff Power Berhad (MPower) through a sub-OMA. Both the OMA and sub-OMA are co-terminous with the 25-year power purchase agreement between TBP and Tenaga Nasional Berhad (TNB).

The rating is underpinned by the strength of the unconditional and irrevocable cash deficiency support from MPower to top up any shortfall in Tanjung Bin O&M’s finance service reserve account (FSRA) to meet the minimum required balance. MARC has a senior unsecured rating of AA-/Stable on MPower. The rating incorporates Tanjung Bin O&M’s sufficient cash flow coverage on the back of satisfactory operational performance of the TBP plant.

For 2015, the plant’s average capacity factor of 77.0% was lower than the 2014 capacity factor of 83.2%. This was mainly attributed to the additional scheduled outage allocated for major maintenance works under the boiler improvement programme which was completed in early-2016. However, Tanjung Bin O&M did not incur any liquidated ascertained damages (LAD) penalty as the TBP plant met performance requirements relating to heat rate, unscheduled outage limit and contracted average availability target (CAAT). For 1Q2016, TBP’s operating results indicate that its plant’s performance is on course to recover to levels before experiencing prolonged outages in 2013 for which MPower provided a one-off undertaking to fund the LAD incurred by Tanjung Bin O&M as well as help cover maintenance expenses of TBP’s boiler improvement programme.

MARC also opines that TBP’s significant generation capacity, competitive second-tier capacity rate financial from 2019 onwards and its cheaper generation cost compared to a gas-fired plant will continue to support TBP’s high dispatch merit order. For 2015, Tanjung Bin O&M’s revenue decreased by 3.2% to RM313.1 million in line with the plant’s lower net electrical output. Coupled with the high maintenance costs in 2015, the company registered operating profit before interest, tax, depreciation and amortisation (OPBITDA) of RM3.0 million (2014: RM87.9 million). However, Tanjung Bin O&M’s cash flow from operations improved to RM91.0 million in 2015 (2014: RM74.9 million) and is sufficient to cover the finance service obligations of RM70.6 million in the corresponding period. Meanwhile, Tanjung Bin O&M’s current ratio of 0.48 times reflects the company’s non-trade payables due to MPower and Malakoff of RM214.5 million which represent 36.6% of the total current liabilities in 2015 (2014: 39.6%). The rating agency is of the view that the parent companies are not likely to make an immediate claim on these payables in light of Tanjung Bin O&M’s sukuk obligations in 2016 and 2017. As at December 31, 2015, the company’s balance sheet cash of RM167.4 million provides comfortable coverage against its financing obligations for 2016 which are estimated at RM74.6 million.

Based on the latest cash flow projections, Tanjung Bin O&M’s minimum pre-distribution finance service cover ratio (FSCR) with cash balance stands at 3.64 times throughout the sukuk tenure. MARC’s sensitivity analysis demonstrates that the company would still be in compliance with the minimum covenanted FSCR of 1.25 times under moderate reduction in plant average capacity factor provided that Tanjung Bin O&M pays lower dividends in the years when sizeable sukuk repayments need to be made. Tanjung Bin O&M’s FSCR would fall below 1.00 time in 2026 when MARC ran a sensitivity analysis with the average capacity factor below 60%. In this regard, MARC expects MPower to inject sufficient funds into Tanjung Bin O&M’s FSRA to meet the sukuk repayment under the cash deficiency support mechanism.

The stable outlook reflects the rating agency’s expectations that TBP’s plant performance will improve to satisfactory levels. The rating and outlook of the Sukuk Wakalah is sensitive to changes in the credit profile of MPower which has provided the cash deficiency support.

Contacts: Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my ; David Lee, +603-2082 2255/ david@marc.com.my.

August 1, 2016