MARC Assigns Preliminary Rating of AA-IS to Southern Power's Proposed Sukuk Wakalah of up to RM4.0 Billion; Outlook Stable

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1. IB ​ ​Press​ ​Release​ ​Service Published​ ​on:​​ ​IslamicBanker.com​ ​Publications:​ ​https://www.islamicmarkets.com/publications MARC​ ​Assigns​ ​Preliminary​ ​Rating​ ​of​ ​AA-IS​ ​to Southern​ ​Power's​ ​Proposed​ ​Sukuk​ ​Wakalah​ ​of up​ ​to​ ​RM4.0​ ​Billion;​ ​Outlook​ ​Stable 21​ ​September​ ​2017 MARC​ ​has​ ​assigned​ ​a​ ​preliminary​ ​rating​ ​of​ ​AA-IS​ ​to​ ​Southern​ ​Power​ ​Generation​ ​Sdn​ ​Bhd's (Southern​ ​Power)​ ​proposed​ ​Sukuk​ ​Wakalah​ ​of​ ​up​ ​to​ ​RM4.0​ ​billion.​ ​The​ ​outlook​ ​on​ ​the​ ​rating​ ​is stable.​ ​Southern​ ​Power,​ ​a​ ​51:49​ ​joint​ ​venture​ ​between​ ​Tenaga​ ​Nasional​ ​Berhad​ ​(TNB)​ ​and SIPP​ ​Energy​ ​Sdn​ ​Bhd,​ ​will​ ​utilise​ ​proceeds​ ​from​ ​the​ ​sukuk​ ​to​ ​develop​ ​a​ ​2x720-megawatt combined​ ​cycle​ ​gas-fired​ ​plant​ ​in​ ​Pasir​ ​Gudang,​ ​Johor. The​ ​rating​ ​reflects​ ​Southern​ ​Power's​ ​predictable​ ​operational​ ​cash​ ​flow​ ​on​ ​the​ ​back​ ​of​ ​the availability-based​ ​tariff​ ​structure​ ​under​ ​a​ ​21-year​ ​power​ ​purchase​ ​agreement​ ​(PPA)​ ​with​ ​TNB, on​ ​which​ ​MARC​ ​has​ ​a​ ​senior​ ​unsecured​ ​debt​ ​rating​ ​of​ ​AAA/Stable.​ ​The​ ​absence​ ​of​ ​demand and​ ​fuel​ ​price​ ​risks​ ​offered​ ​by​ ​the​ ​PPA,​ ​supports​ ​the​ ​project​ ​fundamentals.​ ​The​ ​rating​ ​also considers​ ​the​ ​strong​ ​commitment​ ​from​ ​Southern​ ​Power's​ ​shareholders,​ ​through​ ​a​ ​two-way undertaking​ ​to​ ​address​ ​any​ ​shortfall​ ​in​ ​capital​ ​contributions​ ​from​ ​either​ ​shareholder. The​ ​estimated​ ​total​ ​project​ ​cost​ ​of​ ​up​ ​to​ ​RM4.6​ ​billion​ ​will​ ​be​ ​funded​ ​by​ ​a​ ​debt-to-equity​ ​mix​ ​of 80:20.​ ​A​ ​major​ ​portion​ ​of​ ​the​ ​equity​ ​injection​ ​will​ ​be​ ​partially​ ​met​ ​by​ ​a​ ​junior​ ​facility​ ​of​ ​up​ ​to RM610​ ​million​ ​to​ ​be​ ​set​ ​up​ ​closer​ ​to​ ​the​ ​sukuk​ ​issuance​ ​date.​ ​While​ ​all​ ​outstanding​ ​junior financing​ ​is​ ​expected​ ​to​ ​be​ ​repaid​ ​at​ ​the​ ​commercial​ ​operation​ ​date​ ​(COD)​ ​through​ ​proceeds from​ ​a​ ​redeemable​ ​preference​ ​shares​ ​(RPS)​ ​subscription,​ ​any​ ​unpaid​ ​junior​ ​financing obligations​ ​after​ ​scheduled​ ​COD​ ​will​ ​be​ ​backed​ ​by​ ​a​ ​rolling​ ​guarantee​ ​provided​ ​by​ ​the shareholders.​ ​In​ ​addition,​ ​TNB​ ​has​ ​provided​ ​a​ ​covenant​ ​to​ ​maintain​ ​at​ ​least​ ​51%​ ​direct​ ​or indirect​ ​interest​ ​in​ ​Southern​ ​Power​ ​throughout​ ​the​ ​sukuk​ ​tenure. Constraining​ ​the​ ​rating​ ​are​ ​risks​ ​associated​ ​with​ ​the​ ​project's​ ​construction​ ​and​ ​completion. Southern​ ​Power​ ​has​ ​awarded​ ​the​ ​power​ ​plant​ ​development​ ​to​ ​an​ ​experienced​ ​consortium​ ​led by​ ​Taiwan-based​ ​CTCI​ ​Corporation​ ​(CTCI)​ ​and​ ​General​ ​Electric​ ​Energy​ ​Products​ ​France​ ​SNC (GE).​ ​The​ ​project​ ​will​ ​be​ ​built​ ​under​ ​a​ ​fixed​ ​sum​ ​engineering,​ ​procurement​ ​and​ ​construction (EPC)​ ​contract​ ​with​ ​guarantees​ ​of​ ​performance,​ ​warranties,​ ​liquidated​ ​damages​ ​(LD)​ ​for​ ​any delays​ ​and​ ​a​ ​contingency​ ​sum​ ​equivalent​ ​to​ ​4%​ ​of​ ​the​ ​EPC​ ​cost.​ ​Southern​ ​Power​ ​has​ ​secured an​ ​arrangement​ ​to​ ​fully​ ​hedge​ ​its​ ​US​ ​dollar​ ​exposure​ ​prior​ ​to​ ​the​ ​sukuk​ ​issuance.​ ​MARC​ ​opines that​ ​the​ ​involvement​ ​of​ ​the​ ​original​ ​equipment​ ​manufacturer​ ​GE​ ​under​ ​the​ ​EPC​ ​arrangement​ ​as crucial​ ​to​ ​minimise​ ​problems​ ​related​ ​to​ ​technical​ ​and​ ​plant​ ​design.​ ​Coupled​ ​with​ ​CTCI's
2. IB ​ ​Press​ ​Release​ ​Service Published​ ​on:​​ ​IslamicBanker.com​ ​Publications:​ ​https://www.islamicmarkets.com/publications experience​ ​in​ ​Malaysian​ ​power​ ​plant​ ​construction,​ ​the​ ​implementation​ ​and​ ​execution​ ​risks​ ​of​ ​the project​ ​are​ ​largely​ ​mitigated. During​ ​operations,​ ​Southern​ ​Power​ ​will​ ​receive​ ​capacity​ ​payments​ ​to​ ​cover​ ​its​ ​fixed​ ​operating expenses,​ ​financing​ ​obligations​ ​and​ ​shareholders'​ ​returns,​ ​all​ ​of​ ​which​ ​are​ ​subject​ ​to​ ​an unplanned​ ​outage​ ​rate​ ​of​ ​below​ ​4%​ ​and​ ​a​ ​contracted​ ​average​ ​availability​ ​target​ ​of​ ​at​ ​least​ ​94%. A​ ​key​ ​concern​ ​surrounding​ ​the​ ​project​ ​is​ ​the​ ​short​ ​operational​ ​track​ ​record​ ​of​ ​the​ ​9HA​ ​gas turbines.​ ​In​ ​this​ ​regard,​ ​an​ ​independent​ ​technical​ ​advisor​ ​has​ ​assessed​ ​and​ ​opined​ ​that​ ​the operations​ ​and​ ​maintenance​ ​(O&M)​ ​risk​ ​mitigation​ ​measures​ ​for​ ​the​ ​project​ ​are​ ​adequate considering​ ​the​ ​availability​ ​of​ ​O&M​ ​performance​ ​guarantees​ ​and​ ​the​ ​long-term​ ​service agreement​ ​with​ ​the​ ​original​ ​gas​ ​turbine​ ​supplier.​ ​The​ ​plant​ ​will​ ​be​ ​operated​ ​by​ ​TNB's wholly-owned​ ​subsidiary,​ ​TNB​ ​Repair​ ​and​ ​Maintenance​ ​Sdn​ ​Bhd​ ​under​ ​a​ ​21-year​ ​O&M agreement​ ​(OMA). Southern​ ​Power's​ ​average​ ​post-distribution​ ​financial​ ​service​ ​cover​ ​ratio​ ​(FSCR)​ ​with​ ​cash balance​ ​throughout​ ​the​ ​sukuk​ ​tenure​ ​is​ ​expected​ ​to​ ​stand​ ​at​ ​1.90​ ​times.​ ​The​ ​project's​ ​ability​ ​to meet​ ​the​ ​projected​ ​FSCRs,​ ​however,​ ​is​ ​conditional​ ​upon​ ​a​ ​successful​ ​upward​ ​revision​ ​of​ ​the capacity​ ​rate​ ​financial​ ​prior​ ​to​ ​the​ ​issuance​ ​of​ ​the​ ​sukuk.​ ​The​ ​projections​ ​also​ ​assume​ ​that Southern​ ​Power​ ​will​ ​fully​ ​redeem​ ​its​ ​outstanding​ ​junior​ ​financing​ ​through​ ​proceeds​ ​from​ ​the RPS​ ​subscription​ ​at​ ​the​ ​COD.​ ​Under​ ​MARC's​ ​sensitivity​ ​analysis,​ ​the​ ​project​ ​demonstrates resilience​ ​against​ ​moderate​ ​stressed​ ​scenarios.​ ​The​ ​risk​ ​of​ ​a​ ​severe​ ​plant​ ​underperformance​ ​is mitigated​ ​by​ ​the​ ​OMA's​ ​LD​ ​provisions​ ​as​ ​well​ ​as​ ​insurance​ ​protection.​ ​The​ ​project​ ​is​ ​also covered​ ​by​ ​LD​ ​payments​ ​from​ ​the​ ​EPC​ ​contractor​ ​which​ ​provide​ ​adequate​ ​protection​ ​for​ ​the potential​ ​loss​ ​of​ ​operational​ ​cash​ ​flow​ ​and​ ​delay​ ​penalty​ ​under​ ​the​ ​PPA.​ ​Consistent​ ​with​ ​its rated​ ​peers,​ ​the​ ​requirement​ ​to​ ​maintain​ ​an​ ​FSCR​ ​of​ ​1.50​ ​times​ ​post-distribution​ ​ensures​ ​that Southern​ ​Power​ ​would​ ​exercise​ ​prudence​ ​in​ ​its​ ​liquidity​ ​management​ ​particularly​ ​in​ ​the​ ​period of​ ​plant​ ​underperformance. The​ ​stable​ ​outlook​ ​reflects​ ​MARC's​ ​expectations​ ​that​ ​construction​ ​will​ ​progress​ ​on​ ​schedule​ ​and stay​ ​within​ ​the​ ​allocated​ ​budget.​ ​The​ ​outlook​ ​is​ ​also​ ​based​ ​on​ ​the​ ​assumptions​ ​that​ ​Southern Power​ ​will​ ​receive​ ​the​ ​required​ ​approval​ ​for​ ​the​ ​PPA​ ​tariff​ ​revision​ ​and​ ​the​ ​project​ ​coverage​ ​will be​ ​maintained​ ​at​ ​current​ ​levels​ ​following​ ​such​ ​revision. Organisation​ ​Name: News​ ​Type: Source: Malaysian​ ​Rating​ ​Corporation​ ​Berhad​ ​(MARC) RATING​ ​ANNOUNCEMENT BNM​ ​Announcements
3. IB ​ ​Press​ ​Release​ ​Service Published​ ​on:​​ ​IslamicBanker.com​ ​Publications:​ ​https://www.islamicmarkets.com/publications Media​ ​Contact Adib​ ​Asilah,​ ​+603-2717​ ​2943/​ ​asilah@marc.com.my David​ ​Lee,​ ​+603-2717​ ​2955/​ ​david@marc.com.my Disclaimer: This​ ​communication​ ​is​ ​provided​ ​by​ ​Malaysian​ ​Rating​ ​Corporation Berhad​ ​(MARC)​ ​on​ ​the​ ​basis​ ​of​ ​information​ ​believed​ ​by​ ​MARC​ ​to​ ​be accurate​ ​and​ ​reliable​ ​as​ ​derived​ ​from​ ​publicly​ ​available​ ​sources​ ​or provided​ ​by​ ​the​ ​rated​ ​entity​ ​or​ ​its​ ​agents.​ ​MARC,​ ​however,​ ​has​ ​not independently​ ​verified​ ​such​ ​information​ ​and​ ​makes​ ​no​ ​representation as​ ​to​ ​the​ ​accuracy​ ​or​ ​completeness​ ​of​ ​such​ ​information.​ ​Any assignment​ ​of​ ​a​ ​credit​ ​rating​ ​by​ ​MARC​ ​is​ ​solely​ ​to​ ​be​ ​construed​ ​as​ ​a statement​ ​of​ ​its​ ​opinion​ ​and​ ​not​ ​a​ ​statement​ ​of​ ​fact.​ ​A​ ​credit​ ​rating​ ​is not​ ​a​ ​recommendation​ ​to​ ​buy,​ ​sell,​ ​or​ ​hold​ ​any​ ​security.