[RAM] RAM Ratings downgrades Telekosang Hydro One's Senior Sukuk and Junior Bonds, maintains Negative Rating Watch
RAM Ratings has downgraded the rating of Telekosang Hydro One Sdn Bhd’s (TH1 or the Issuer) RM470 mil ASEAN Green SRI Sukuk (2019/2037) (Senior Sukuk) to BBB1 from A1. Concurrently, the rating of its RM120 mil ASEAN Green Junior Bond (2019/2039) (Junior Bonds) has been lowered to BB2 from BBB1. Both ratings remain on Rating Watch with a Negative outlook, reflecting increased execution, liquidity and recovery risks for the transaction, following the prolonged outage of the project assets.
The rating actions reflect a marked deterioration in TH1’s debt-servicing ability after severe floods in February 2026 forced the shutdown of its two small hydropower plants from 24 February 2026. In our view, the prolonged loss of generation has materially increased the liquidity stress and the likelihood of a payment default in August 2027, in the absence of timely and sufficient external liquidity support. Without such support, TH1 could face further downward rating pressure. The Senior Sukuk and Junior Bonds are serviced from the combined cashflow generated by TH1 and its sister company, Telekosang Hydro Two Sdn Bhd (TH2) (collectively, the Group or Project Companies), from their respective small hydropower plants.
Despite the increased default risk, the Senior Sukuk’s rating considers potential recoveries that could become available over the next few months. These include insurance proceeds for business interruption losses arising from the current plant downtime and possible performance bond recoveries, with the latter subject to the resolution of the ongoing legal suit/arbitration with the contractor by end-2026.
Under RAM’s scenario analysis, which assumes the Plants are recommissioned only by February 2027 and generate no cashflows up to June 2027, estimated loss of revenue insurance proceeds of RM49 mil could be sufficient to preserve the Senior Sukuk’s investment grade rating, provided plant rehabilitation progresses as planned and claims are received in a timely manner. The Group has received various vendor proposals and is close to appointing an experienced contractor as the main rehabilitation civil contractor, although execution risk remains high until works commence and a firm recovery timeline is established.
The ratings remain on Rating Watch with a Negative outlook because material uncertainties remain over the quantum and duration of revenue loss, the timing and cost of restoring full plant operations, the quantum and timing of insurance claims and performance bond proceeds, and the risk of a Senior Sukuk default in August 2027. Any slippage in plant restoration, recovery proceeds or liquidity support could further compress the Group’s liquidity runway and could trigger a multi-notch downgrade. RAM expects to provide an update by early 2027, following greater visibility on the legal suit or arbitration and the rehabilitation timetable.
The Junior Bonds are now rated four notches below the Senior Sukuk, compared with three notches previously. The wider notching reflects their equity-like absorption features, deep contractual subordination to the Senior Sukuk in terms of cashflow priority, and weaker recovery prospects as stress at the senior Sukuk level intensifies. In our view, the increased probability of default on the Senior Sukuk increases the likelihood that cash flow shortfalls or recovery delays will be borne by the Junior Bonds.
RAM’s Rating Watch highlights a possible change in an issuer’s debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under RAM’s special surveillance. In a broader sense, the Rating Watch covers any event that may result in changes in risk factors relating to the repayment of principal and interest.
Issues are put on Rating Watch when some of the abovesaid events are expected to or have occurred. The Rating Watch, however, does not mean that the rating will inevitably be changed. It only means that RAM is evaluating the rating and a final affirmation is pending. A “positive” outlook indicates that a rating may be raised while a "negative" outlook indicates a possible downgrade. A “developing” outlook refers to unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.
Analytical contacts
Karin Koh, CFA
(603) 2708 8237
karin@ram.com.my
Chong Van Nee, CFA
(603) 2708 8210
vannee@ram.com.my
Media contact
Sakinah Arifin
(603) 2708 8212
sakinah@ram.com.my