MARC AFFIRMS AAIS AND AAAIS(fg) RATINGS ON RANHILL POWERTRON II SDN BHD’S RM710 MILLION ISLAMIC MTN PROGRAMME

MARC has affirmed Ranhill Powertron II Sdn Bhd’s (RPII) RM270 million outstanding non-guaranteed notes and RM350 million outstanding guaranteed notes at AA_IS and AAA_IS(fg) respectively. The outlook for the ratings is stable. The non-guaranteed and guaranteed notes were issued under the RM710 million Islamic Medium-Term Notes (IMTN) Programme.

RPII is a special purpose project company incorporated to build, own and operate the 190-megawatt (MW) combined-cycle gas fired Rugading Power Station in Sabah under a 21-year Power Purchase Agreement (PPA) with Sabah Electricity Sdn Bhd (SESB), an 83%-owned subsidiary of Tenaga Nasional Berhad (TNB).  The rating on the guaranteed notes is based on the unconditional and irrevocable Kafalah guarantee provided by Danajamin Nasional Berhad (Danajamin), on which MARC has an insurer financial strength rating of AAA/Stable. 

The AA_IS rating on the non-guaranteed notes reflects RPII’s strong projected cash flow coverages backed by availability-based capacity payments under the PPA, which are designed to cover the RPII’s fixed costs, capital investment costs and shareholders’ returns. The rating also takes into account the strength of the PPA which allocates demand risk and fuel price risk to the offtaker, SESB. RPII’s sound plant performance as at to date and cash flow generation that is consistent with projections support the AA_IS rating. These strengths are moderated by RPII’s reliance on retained cash balances for finance service obligations from 2023 onwards due to a step down in the PPA’s capacity rate financial. The rating is also constrained by RPII’s weakening profitability metrics as a result of lower plant despatch during the period under review.

For 2015, RPII received capacity payments of RM96.8 million as budgeted, based on the power plant’s actual availability of 95.2%. RPII is positioned to meet the contracted average availability target (CAAT) of at least 94% for the contract year block 2014-2016 in view of the comfortable buffer provided by its actual CAAT of 96.7% as at March 31, 2016. The company also achieved a full pass-through of natural gas and distillate costs to SESB on meeting the heat rate requirements. Nonetheless, actual energy payments (EP) of RM91.3 million were 13.5% below the budgeted EP attributed to the plant operating at a lower load factor. This is due to the excess supply capacity situation on the west coast of Sabah which is expected to be prolonged over the medium term.

As a result, RPII’s profit margin has been affected given that operations and maintenance (O&M) obligations are fixed under a long-term contract with related entity Ranhill Power II O&M Sdn Bhd. The rating agency is concerned that the frequent systematic shutdowns and subsequent start-up sequence of the gas turbines may potentially exert undue stress on the power plant in the long run.

RPII’s cash flow from operations of RM91.0 million for 2015 was in line with projections and was sufficient to cover the finance service obligations of RM69.4 million on the rated notes. In 2015, the company made a lower dividend payment of RM12.0 million in 2015 (2014: RM77.4 million) to its shareholders. RPII’s majority shareholder Ranhill Group Sdn Bhd had transferred its 80% stake to Ranhill Capital Sdn Bhd following a corporate reorganisation exercise in December 2015; the remaining 20% is held by Sabah Energy Sdn Bhd.

RPII’s debt-to-equity ratio of 3.66 times as at March 31, 2016 is well within the covenanted leverage level of 4.00 times and is expected to decrease progressively with the paring down of outstanding notes. RPII’s designated account balances of RM96.7 million as at August 22, 2016 provides sufficient coverage for the finance service obligations under the IMTN Programme amounting to RM62.7 million for the next 12-month period. RPII registered a post-distribution finance service cover ratio (FSCR) of 2.56 times in 2015; its FSCR has continued to decline as sukuk principal repayments increased. RPII is anticipated to achieve minimum and average pre-distribution FSCR of 2.31 times and 2.95 times respectively for the remaining IMTN Programme tenure.

MARC’s sensitivity analysis reveals that cash flow coverage of the non-guaranteed notes would remain adequate in the event of a 10% reduction in both the capacity and energy revenues and plant load factor of 50%. However, under these scenarios, RPII is expected to have lower liquidity buffer to support the repayment of the guaranteed notes which rely heavily on retained cash during the tenure of the non-guaranteed notes. Noteholders can derive comfort from the restrictive distribution covenants that prevent a further weakening of the cash balance in the event of performance stresses. Further mitigating performance-related and event risks are the liquidated damages provisions under the O&M agreement and insurance coverage as stipulated in the PPA.

The stable outlook on the non-guaranteed notes incorporates MARC’s expectations that RPII’s credit profile will remain commensurate with the current rating supported by a stable plant performance. Any deviations from these assumptions will exert downward rating pressure on the non-guaranteed notes. In respect of the guaranteed notes, any change in the rating and/or outlook will be primarily driven by a change in Danajamin’s credit strength.

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

August 25, 2016