MARC has affirmed its AA+IS rating on Kapar Energy Ventures Sdn Bhd's (KEV) RM2.0 billion Sukuk Ijarah. The rating outlook has been revised to negative from stable.
KEV owns and operates the 2,200 MW Kapar Power Station. The affirmed rating benefits from a two-notch support uplift from KEV's standalone rating of AA- to reflect MARC's expectation of a very high probability of parental support from Tenaga Nasional Berhad (TNB) (AAA/Stable), which has 60.0% ownership in KEV. Malakoff Corporation Berhad (Malakoff) holds the remaining 40.0%.
The outlook revision reflects KEV's continued weakening plant operating performance in 2019 with three of the plant's generating facilities reporting unplanned outage rates (UOR) exceeding the power purchase agreement (PPA) requirements. The operational problems have heightened the risk on cash flow protection that has already been pressured by a step-down in the capacity rate financial (CRF) from July 2019 onwards. While KEV has taken steps to restore the plant's operations, MARC views the generating facilities would remain susceptible to operational issues arising from their age and design.
As a result of the high UOR, KEV's capacity payments declined to RM509.4 million from RM626.0 million in the previous year. The unplanned outages also caused a decline in net electricity dispatch from the plant, resulting in a reduction in energy payments received to RM1,719.2 million (2018: RM1,978.5 million). KEV registered higher pre-tax losses of RM330.6 million (2018: pre-tax losses of RM37.5 million), while cash flow from operations stood at negative RM24.3 million.
MARC is of the view that in order to preserve liquidity to meet KEV's senior financial obligations, it can opt to defer its redeemable unsecured loan stock (RULS) repayments to TNB and Malakoff. KEV has exercised this option in the past and fully deferred its RULS principal repayment and interest payment of RM321.5 million in 2019.
The rating agency's sensitivity analysis demonstrates that KEV's pre-distribution finance service coverage ratio (FSCR) can withstand mild stress scenarios such as a reduction in capacity payments of up to 2.0% p.a. before breaching the covenanted level of 1.30x in 2025. MARC will continue to monitor the performance of the generating facilities. The rating could be lowered if operating performance continues to weaken such that cash buffers are reduced without adequate measures put in place to shore up KEV's liquidity position. Conversely, the rating outlook could be revised to stable if KEV's mitigation plans result in an improvement in plant performance and liquidity position over the near term.