[RAM] RAM Ratings reaffirms SPR Energy's AA3/Stable sukuk rating - 05 Jul 2019

Published on 05 Jul 2019.

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). SPR is an independent power producer that owns and operates a 100 MW combined-cycle, gas turbine power plant in Kimanis, Sabah (the Plant). The Company's debt-servicing ability is expected to remain healthy, despite having faced multiple operational issues in the past.

The Company's business fundamentals are largely underscored by fixed Available Capacity Payments (ACPs), so long as it meets its performance requirements. Meanwhile, a smaller portion of its revenue is contributed by Daily Utilisation Payments (DUPs) which expose SPR to demand risk. Nonetheless, the Company has to date been able to receive full DUPs. Furthermore, SPR has been able to consistently fully recoup its fuel expenses via energy payments, after having met the required heat rates under its Power Purchase Agreement (PPA) with Sabah Electricity Sdn Bhd.

While the performance of SPR's power plant weakened in fiscal 2018, with a higher-than-expected rolling unscheduled outage rate (UOR, 11.03%) and reduced ACPs (amounting to RM14.08 mil or 13% of total revenue), its performance rebounded in 5M 2019 following rectification works and a major overhaul in October 2018. As at end-May 2019, the Plant's rolling UOR had improved to 4.90% while ACP losses had eased to RM0.35 mil (or 1% of total revenue).

Notably, the PPA's requirements in the event of non-performance are more stringent than those of other IPPs, particularly in respect of an immediate penalty for breach of the stipulated unscheduled outage limit. As the mechanism of risk transfer to General Electric (GE), i.e. the Plant's operation and maintenance service provider, does not mirror the PPA, any ACP shortfall may not be fully compensated by liquidated damages, thus 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.

Looking ahead, SPR's healthy debt-servicing ability will be reflected in its projected minimum and average annual finance service coverage ratios (FSCRs) (with cash balances, post-distribution, calculated on payment dates) of a respective 1.50 and 1.77 times throughout the remaining tenure of the Sukuk. However, RAM's sensitised cashflow analysis indicates that the Company's FSCRs will come in at the lower end of our rating threshold over the next four years, hovering between 1.51 and 1.55 times without any payment under the Junior Sukuk or dividend payouts to its shareholders. Beyond that, we derive some comfort from SPR's stringent covenants, which should support its cash retention.

Under the financing terms, SPR's operational disbursements are determined by its budget, which is prepared in accordance with the base-case financial model. Any excess amount requires approval from the Security Agent (if 6% or less) and the sukukholders/financiers (if more than 6%). Moreover, SPR is subject to stricter distribution covenants, i.e. an FSCR of at least 1.60 times and an additional distribution-restriction period. We expect SPR to adhere to its financial covenants throughout the tenure of the Senior Sukuk when contemplating distribution payments, as opposed to only in the year of assessment.

Analytical contact
Chu Jia Ying
(603) 3385 2519
jiaying@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my