RAM Ratings assigns AA1 rating to Sarawak Energy’s proposed RM15 billion sukuk

Published on 23 June 2011

RAM Ratings has assigned a long-term rating of AA1 (with a stable outlook) to Sarawak Energy Berhad's ("SEB" or "the Group") proposed Sukuk Musyarakah Programme of up to RM15 billion ("Sukuk"). SEB is the Sarawak State Government’s (“the State”) wholly owned, vertically integrated electricity group with a monopoly over the generation, transmission and distribution of electricity in Sarawak. The rating is premised on this integral role and the strong support from both the State and Federal Governments. These strengths are however, moderated by demand risk arising in relation to the sizeable new generating capacity on the horizon and its expected impact on SEB’s financial profile.

The Group has emerged as a key facilitator of the State and Federal Governments’ plans to tap Sarawak’s vast energy resources via the development of the Sarawak Corridor of Renewable Energy (“SCORE”). In fulfilling these aspirations, SEB’s generating capacity is set to triple within a relatively short time, with Sarawak’s electricity reserve margin expected to peak at 150% by 2012 (2010: 13%).

Naturally, demand risk will feature more prominently in our assessment of the Group’s credit profile, along with concentration risk arising from the relatively larger industrial off-takers that will establish operations in the SCORE. Nonetheless, these risks are moderated to some extent by the respective take-or-pay power purchase agreements that will be in place and the Group’s diverse customer profile. SEB has to date secured buyers for roughly half of the new 3,011 MW of capacity coming on-stream by 2015. In the meantime, the remaining capacity is expected to be taken up by additional off-takers that are in negotiations with SEB.

To keep pace with the State’s new-found energy needs under the SCORE, the Group’s debt load is projected to increase from RM2.51 billion as at end-December 2010 to RM16.69 billion by end-December 2013, at which point its gearing level is envisaged to peak at 4.27 times. In line with the expected lengthy gestation period for such endeavours, this will mark the beginning of a phase of weak financials, during which SEB’s funds from operations debt coverage is anticipated to drop from 0.30 times as at end-2010 to a mere 0.06 times over the next few years.

Meanwhile, SEB maintains its close links with the State; as a unit directly under the purview of the State Financial Secretary, it enjoys strong implicit support from the State, which determines its strategic direction, board of directors and key management. Heavily subsidised natural gas from Petroliam Nasional Berhad is also made available to the Group. RAM Ratings believes that there is great incentive for financial assistance to be provided, if necessary, because SEB’s failure to meet its financial and operational obligations would severely undermine the SCORE’s success.

Media contact
Shankar Jayanathan
(603) 7628 1030
Shankar@ram.com.my

Yean Ni Ven
(603) 7628 1172
niven@ram.com.my