[RAM] RAM assigns AA3 rating to world's first mini-hydro green sukuk by Telekosang Hydro - 31 May 2019

Published on 31 May 2019.

RAM Ratings has assigned a preliminary AA3/Stable rating to Telekosang Hydro One Sdn Bhd's (TH1) proposed RM470 mil ASEAN Green SRI Sukuk under the Shariah principle of Wakalah Bi Al-Istithmar (2019/2037) (Senior Sukuk). Concurrently, we have also assigned a preliminary A2/Stable rating to TH1's proposed RM120 mil ASEAN Green Junior Bonds (2019/2039) (Junior Bonds).
The proposed Senior Sukuk is the world's first rated mini-hydro project sukuk that is aligned with the requirements of Securities Commission Malaysia's Sustainable and Responsible Investments Sukuk Framework, the ASEAN Green Bond Standards, and the globally recognised Green Bond Principles. TH1's Green Sukuk Framework has been reviewed by RAM Consultancy Services Sdn Bhd.
The Project Companies (comprising TH1 and Telekosang Hydro Two Sdn Bhd (TH2)) have each signed 21-year Renewable Energy Power Purchase Agreements (REPPAs) with Sabah Electricity Sdn Bhd (SESB), in relation to two small hydropower plants with a combined installed capacity of 40 MW in Tenom, Sabah (the Projects). The Scheduled Feed-in Tariff Commencement Date (FiT CD) for the Projects is 31 July 2021, with an expected 24-month construction period. While TH1 is the issuer of both the proposed Senior Sukuk and Junior Bonds, the Project Companies will be joint signatories to the relevant financing agreements, ensuring their due performance in supporting TH1's financing obligations. The total estimated project cost of RM587.50 mil will be funded via the issuance proceeds of the proposed Senior Sukuk (80%), the proposed Junior Bonds (3%) and redeemable preference shares (17%).
The proposed Senior Sukuk's rating reflects the Project Companies' sound business fundamentals, backed by favourable REPPAs terms with a strong utility off-taker, as well as the use of proven plant technology. The REPPAs accord priority of dispatch to the Project Companies, thereby counterbalancing the absence of fixed availability-based revenue. "The technology for small hydro plants is matured, highly efficient and undemanding in terms of operations and maintenance (O&M) requirements. In arriving at the rating, RAM is further comforted by the management's experience in hydro power as well as the engagement of reputable consultants, equipment suppliers and contractors in executing the Projects," highlights Chong Van Nee, RAM's co-head of Infrastructure and Utilities Ratings.

These credit strengths are, however, constrained by the Projects' exposure to a moderate degree of construction risk, particularly with respect to geographical challenges and logistical difficulties in the construction of access roads and waterways amid a mountainous location. Notably, these risks are somewhat addressed by a reasonably adequate contingency sum (6% of the contract sum), an additional three-month construction time buffer, and the fixed-priced, lump-sum turnkey contract with Sinohydro Corporation (M) Sdn Bhd and its ultimate holding company, Power Construction Corporation of China, Ltd (Power China). The Power China Group is a state-owned entity that has successfully undertaken various complex hydro projects in both China and Malaysia. We believe that this will help minimise construction challenges.
To ensure alignment of interests during the operational phase, the Project Companies have entered into long-term O&M agreements (16 years) with Global Elite O&M Sdn Bhd, a joint-venture company of the original equipment manufacturer (Global Hydro Energy Gmbh Austria). Nonetheless, the Projects are inherently vulnerable to the variability of rainfall patterns and river flow, which determines the amount of electricity it generates. "Hydrology conditions will be affected by future developments or prolonged scant rainfall. That said, we note that 82% of the Projects' catchment area lies within forest reserves with limited developmental activities," highlights Chong. Notably, the Projects' lengthy transmission lines are susceptible to interference, thereby increasing outage risk, which we have incorporated into our cashflow assessment.
Based on RAM's sensitised cashflow analysis, the Project Companies' debt-servicing ability is expected to be strong, with respective minimum and average annual finance service coverage ratios (FSCRs, with cash balances, post-distribution and calculated on payment dates) of a respective 1.72 and 2.31 times throughout the proposed Senior Sukuk's tenure. Our assessment includes the assumption of a slower average flow rate of 15.51 m3/s for TH1 (44% of the actual flow rate; base case: 16.65 m3/s) and higher incidence of dry weather, leading to an overall plant factor of 75% (base case: 81%). The Project Companies' strong debt coverage is further supported by our expectation that they will adhere to a stringent distribution covenant of having to maintain the Projects Subordination Distribution FSCR of at least 1.45 times throughout the proposed Senior Sukuk's tenure.
Meanwhile, the preliminary A2/Stable rating of TH1's proposed Junior Bonds is premised on their strong equity-like features and deep subordination in terms of cashflow priority. Furthermore, the proposed Junior Bonds are supported by a minimum annual FSCR of 1.45 times during their tenure, which is commensurate with the benchmark FSCR for an A2 rating. The proposed Junior Bonds have been structured as zero-coupon bonds, with repayment only starting after the full redemption of the proposed Senior Sukuk, i.e. in July 2038 and 2039.

Analytical contact
Yip Chee Meng
(603) 3385 2516
cmyip@ram.com.my
Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my