MARC AFFIRMS ITS AAAIS(bg) AND AAAIS(fg) RATINGS ON RANHILL CAPITAL’S RM800 MILLION SUKUK MUSHARAKAH FACILITY

MARC has affirmed its ratings of AAA_IS(bg) and AAA_IS(fg) on Ranhill Capital Sdn Bhd’s (Ranhill Capital) RM300 million bank-guaranteed (Tranche 1) and RM500 million Danajamin-guaranteed (Tranche 2) Sukuk Musharakah facilities respectively. The outlook on the ratings is stable. The ratings on Tranche 1 and Tranche 2 reflect the credit strength of the unconditional and irrevocable guarantees from Maybank Islamic Berhad (AAA/Stable) and Danajamin Nasional Berhad (AAA/Stable) respectively.

Ranhill Capital is the intermediate holding company of newly incorporated investment holding company Ranhill Holdings Berhad (Ranhill) that was formed as part of a corporate restructuring exercise in 2015 and is listed on Bursa Malaysia. Under the restructuring exercise, Ranhill acquired Ranhill Group Sdn Bhd’s (RGSB) key subsidiaries and injected them into Ranhill Capital. At the same time, RGSB’s Sukuk Musharakah facilities were novated to Ranhill Capital. The corporate restructuring exercise has no rating impact on the rated facilities.

The residual cash flows from key operating subsidiaries, namely SAJ Holdings Sdn Bhd (SAJH), Ranhill Powertron Sdn Bhd (RPI) and Ranhill Powertron II Sdn Bhd (RPII), continue to be the principal source of repayment for the notes issued under the facilities. Of these, SAJH is expected to remain as the group’s main dividend contributor given its stable operations as the sole water service provider in Johor and its debt-free status. SAJH’s revenue rose by 10.3% y-o-y to RM966.2 million in FY2015 on the back of a 14% water tariff hike which came into effect in August 2015. SAJH, whose financial commitments are limited to lease payments for the water assets, retains strong dividend repayment capacity with cash balance of RM188.8 million as at end-December 2015.

Nonetheless, SAJH is exposed to licensing risk given that it operates under an exclusive three-year renewable licence, which expires at end-December 2017. MARC also notes that no compensation will be paid if SAJH’s operating licence is not renewed. However, licence non-renewal risk is mitigated by SAJH’s good operating record since 1999, and its ability to meet key performance indicators as has been set out by the National Water Services Commission. Ranhill Capital’s power generation subsidiaries RPI and RPII, with a total dependable capacity of 380.0 megawatts, account for 24.2% of total installed capacity in Sabah. Due to the excess capacity situation in Sabah, RPI and RPII experienced revenue declines of 14.6% and 18.3% y-o-y to RM199.6 million and RM103.9 million for 2015 respectively on lower energy generation. MARC foresees the excess capacity situation in Sabah to persist over the near term, which would continue to weigh on the financial performance of RPI and RPII.

However, RPI’s capital structure has improved following its full redemption of RM220 million outstanding bonds from part proceeds of RM386.8 million from Ranhill’s recent public offering exercise. The redemption has also freed up RPI’s restricted deposits of RM121.8 million which, in addition to cash and cash equivalents of RM32.4 million as at end-December 2015, has strengthened its liquidity position. MARC opines that RPI would be in a better position to provide a stable stream of dividends to the holding company going forward. In the case of RPII, the power plant operator has a non-recourse project finance debt of RM651.4 million; cash and bank balances stood at RM102.6 million as at end-December 2015 against principal and profit payments of RM30.0 million and RM37.9 million respectively in 2016. For 2015, the three entities upstreamed RM101.7 million in dividends (2014: RM112.0 million), of which RPI and SAJH’s contribution stood at RM17.8 million and RM64.3 million respectively.

For 1H2016, Ranhill recorded consolidated revenue and pre-tax profits of RM701.8 million and RM95.8 million respectively. Total group borrowings declined to RM1.47 billion (FY2015: RM1.63 billion) following the redemption of RPI’s bonds. Ranhill also undertook a partial redemption of its sukuk amounting to RM100.0 million in August this year, in addition to the RM60.0 million principal payment on the facility in May. Ranhill has plans to invest in new power projects with the RM169.1 million in proceeds from the proposed divestment of its 60% equity interest in Ranhill Water (Hong Kong) Ltd (RWHK), a China-based industrial wastewater treatment company. The proposed divestment by end-2016 will also result in group borrowings being reduced by RM148.3 million from the deconsolidation of RWHK.

As at end-June 2016, group debt-to-equity stood at 2.0 times, down from 4.3x at end-December 2015. This notwithstanding, MARC highlights that the total outstanding RM736.0 million under Tranche 1 and Tranche 2 has been classified under current liabilities due to a breach of financial covenant with the guarantors. MARC understands that the guarantors have granted indulgence until end-2018 for the company to meet the stipulated financial covenant under each tranche’s guarantee agreement.

                                                                                                                         

Sukukholders are insulated from downside risk related to the credit profile of Ranhill Capital by the guarantees provided by Maybank Islamic and Danajamin. Any change in the supported ratings or rating outlook would be primarily driven by changes in the credit strength of the guarantors.

Contacts: Hari Vijay, +603-2082 2280/ harivijay@marc.com.my; Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my.

October 05, 2016