MARC affirms Malakoff unit’s RM470m sukuk wakalah rating


MALAYSIAN Rating Corp Bhd (MARC) has affirmed its AA-IS rating on Tanjung Bin O&M Bhd’s RM470 million Islamic securities (sukuk wakalah) with a stable outlook.

It said the rating reflects the credit strength of Tanjung Bin O&M’s parent Malakoff Power Bhd (MPower), which has provided cash deficiency support to top up any shortfall in the finance service reserve account for the sukuk wakalah.

“MARC has applied a full credit substitution approach on Tanjung Bin O&M’s credit risk assessment with MPower’s senior credit rating of AA-/Stable serving as the rating floor,” it said in a statement yesterday.

The rating is supported by predictable cashflow generated by Tanjung Bin O&M as the operations and maintenance services (O&M) provider of the 2,100MW power plant owned by sister company Tanjung Bin Power Sdn Bhd.

Tanjung Bin Power is a subsidiary of Malakoff Corp Bhd, the parent of MPower.

“The rating also incorporates the partial transfer of operational risks to MPower via a sub-operations and maintenance agreement (sub-OMA). The OMA and sub-OMA are coterminous with the 25-year power purchase agreement between Tanjung Bin Power and Tenaga Nasional Bhd,” the ratings agency added.

Tanjung Bin O&M’s revenue consists mainly of fixed operating fees and variable operating fees, which are based on the Tanjung Bin Power plant’s net electricity output.

The firm’s revenue declined by 0.2% in 2018 to RM339.5 million due to a lower electricity dispatch of 15,566 GWh versus 15,856 GWh in 2017.

However, pretax profit declined to RM41.9 million from RM51 million in 2017 on higher finance costs which are expected to remain high, given that interest on amounts due to the holding company and immediate holding company would be accounted for from 2018 onwards.

The group’s revenue is expected to grow in 2019 with the increase in fixed and variable income by 4% each as per the OMA, which would moderate the impact from higher planned outages for scheduled maintenance in the year.

Cashflow from operations was lower at RM43.4 million, mainly due to payment of payables for the scheduled maintenance outages.

The company does not have any sukuk repayment in 2018 and has built up its liquidity position to meet future obligations.

“The sukuk outstanding was RM290 million as at end-September 2019. Cash balance stood higher at RM174 million. Based on cashflow projections, Tanjung Bin O&M’s cashflow from operations can cover sukuk obligations except for 2021, during which the first of three major overhauls scheduled over the remaining sukuk tenure will occur,” MARC said.

Tanjung Bin O&M will also need to rely on retained cash in 2021, as its total financial obligations of RM70.3 million under the sukuk wakalah will coincide with a major overhaul which is budgeted to cost RM50 million.

“Any material changes in the credit quality of MPower or Tanjung Bin Power would lead to downward rating pressure given the substantial operational and financial linkages between the entities,” the ratings firm said.