Posted Date: October 12, 2020

MARC has assigned a preliminary rating of AA-IS to Sparks Energy 1 Sdn Bhd's (Sparks Energy 1) proposed ASEAN Green Sustainable and Responsible Investment (SRI) Sukuk of up to RM220.0 million. The rating outlook is stable.

Sparks Energy 1 is a special purpose vehicle incorporated to raise funding to develop a 30MWac solar power plant in Kuala Muda, Kedah and Machang, Kelantan. The power plants are being developed by BGMC BRAS Power Sdn Bhd (BBPSB) and Idiwan Solar Sdn Bhd (ISSB) under solar power purchase agreements (PPA) with Tenaga Nasional Berhad (TNB) (AAA/Stable).

The assigned rating is driven by Sparks Energy 1's projected adequate cash flow coverage on the back of the 21-year fixed tariff PPAs with TNB. The rating also considers the project's strong finance-to-equity ratio of 53:47 and the fixed lump sum engineering, procurement, construction and commissioning (EPCC) contract that transfers the risk of any cost overrun to the EPCC contractor. Moderating the rating are risks associated with project completion and variability of solar resource.

The total cost for both projects is RM411.7 million. Proceeds from the proposed sukuk will be utilised to subscribe to unrated sukuk to be issued by BBPSP and ISSB; however, the equity of RM191.7 million, mainly consisting of redeemable preference shares amounting to RM191.5 million, will be issued and fully utilised for the project before the issuance of the sukuk.

The fixed-sum EPCC contract has been awarded to a consortium comprising China Machinery Engineering Corporation (CMEC) and its subsidiaries, and a domestic construction company, Mattan Engineering Sdn Bhd (CMEC-Mattan consortium). The consortium members have undertaken and completed the construction of a 50MW solar power project in Negeri Sembilan and a 29MW plant in Johor. Construction of the solar power plants has been delayed by the movement restrictions imposed in the wake of the COVID-19 pandemic; as at end-July 2020, the Kuala Muda and Machang plants recorded actual progress of 48% and 42% against the scheduled 92% and 94%. As the movement restrictions led to a suspension of work for 84 days, both project companies have sent a force majeure notice to TNB on March 18, 2020 and revised the commercial operation date (COD) to December 13, 2020 (Kuala Muda plant) and January 17, 2020 (Machang plant). TNB is expected to revert by end of October 2020.

CMEC-Mattan consortium will operate the plants under a 3-year operations and maintenance (O&M) contract with an option for yearly extension. O&M risk is mitigated by performance guarantee provisions under the O&M and EPCC contracts, as well as equipment guarantee from suppliers. The projected cash flow is expected to have minimum and average finance service cover ratios (FSCR) with cash of 1.91x and 2.24x throughout the sukuk tenure. The cash flow projection can withstand moderate sensitivity analysis which includes an additional six-month delay in project completion, 10% increase in O&M cost and higher plant outage.

The stable outlook reflects MARC's expectation that the projects will be granted extensions of time by TNB for the force majeure and the construction work will be completed within the allocated budget.

Lee Chi Han, +603-2717 2939 / chihan@marc.com.my;
Lim Wooi Loon, +603-2717 2943 / wooiloon@marc.com.my;
Sharidan Salleh, +603-2717 2954 / sharidan@marc.com.my

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