FW: RAM Ratings reaffirms SPR Energy’s AA3/Stable sukuk rating

 

Published on 14 Aug 2018.

RAM Ratings has reaffirmed the AA3/Stable rating of SPR Energy (M) Sdn Bhd's (SPR or the Company) Senior Sukuk Ijarah of RM580 million (the Sukuk). The rating reflects the Company's healthy project fundamentals, underscored by its stable cashflow. 

While the performance of its power plant (the Plant) came within RAM's sensitivity analysis in 2017, several operational challenges in the first five months of this year, particularly the leakages at one of its gas pipelines, had stretched its rolling unscheduled outage rate (UOR) beyond our expectations to 10.90% as at end-May 2018 (end-December 2017: 5.14%; PPA requirement is not to exceed 4%). This had resulted in greater-than-expected available capacity payment (ACP) reductions, which accounted for approximately 5% of its total revenue in 5M 2018 (FY Dec 2017: 2% of total revenue).  

While the issues have since been rectified, we continue to assume several key sensitivities, including high outages in the next two years and lower capacity factors. Based on our sensitised cashflow projections, SPR's debt-servicing ability is expected to stay healthy, with anticipated minimum finance service coverage ratios (FSCRs) (with cash balances, post distribution, calculated on payment dates) of 1.50 times throughout the remaining tenure of the Senior Sukuk. Stricter distribution covenants via a projected FSCR of at least 1.60 times and an additional distribution-restriction period are expected to support the Company's cash retention. RAM assumes SPR will adhere to its financial covenants on a forward-looking basis throughout the transaction's tenure, as opposed to only in the year of assessment. 

Notably, the PPA's requirements in the event of non-performance are more stringent compared to those of other IPPs, particularly in respect of an immediate penalty for breaching the stipulated unscheduled outage limit. SPR is also exposed to fuel supply risk given that the Plant's arrangement for the supply of natural gas provides supply on a firm basis for only 15 years, although we derive comfort from Sabah's substantial gas reserves. As the mechanism of risk transfer to General Electric (GE), the Plant's operation and maintenance operator, does not mirror the PPA, any ACP shortfall may not be fully compensated by liquidated damages drawing some concern. That said, the appointment of GE provides comfort in terms of addressing operational risk given its extensive experience in the power sector.

 

Analytical contact
Nurhayati Sulaiman
(608) 7628 1040
yati@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my