Posted Date: November 30, 2021

MARC has affirmed its preliminary AA-IS rating on Sparks Energy 1 Sdn Bhd's proposed ASEAN Green Sustainable and Responsible Investment (SRI) Sukuk Murabahah 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 two 30MWac solar power plants in Kuala Muda, Kedah and Machang, Kelantan. The rated sukuk will be issued upon achievement of the commercial operation dates (COD) for both plants; proceeds will be used to repay the outstanding bridging loan of RM220.0 million used to fund plant construction. In light of these factors, the rating only considers the operational phase of the project.

The affirmed rating is driven by Sparks Energy 1's projected adequate cash flow coverage on the back of project companies BGMC BRAS Power Sdn Bhd's and Idiwan Solar Sdn Bhd's 21-year solar power purchase agreements with Tenaga Nasional Berhad (rated AAA/Stable). The rating also considers the project's strong finance-to equity ratio of 53:47. Moderating the rating are risks associated with variability of solar resource.

MARC notes that the plants' construction has been delayed by logistical issues as a result of movement restrictions due to the COVID-19 pandemic as well as unfavourable weather conditions. Construction is currently being undertaken beyond the walkaway event dates of September 18 (Kuala Muda) and October 16 (Machang); these dates were extensions from the original walkaway dates in mid-June 2021 as approved by the Energy Commission. The rating agency views termination risk to be low, given the impending completion of both plants. Construction is expected to be completed by December 31, 2021 (Kuala Muda) and January 31, 2022 (Machang), with further walkaway date extensions applied up to end-February 2022 and end-April 2022. This includes an additional two to three months' buffer for the commissioning stage.

The total project cost for both projects remain within the projected RM411.7 million. Cost overrun risk arising from accelerated works undertaken to recover project progress delays is mitigated by the fixed-price turnkey contract with a consortium consisting of China-based China Machinery Engineering Corporation and Mattan Engineering Sdn Bhd (CMEC-Mattan consortium), as well as a contingency sum of RM13.3 million.

During the operational phase, the plants will also be operated by the CMEC-Mattan consortium under a three-year operations and maintenance (O&M) contract with the option for yearly extensions. O&M risk is mitigated by performance guarantee provisions under both engineering, procurement, construction and commissioning (EPCC) and O&M contracts, as well as equipment guarantee from suppliers. MARC's base case cash flow projections assume the COD of both plants on February 1, 2022 and P90 energy production levels. Projected cash flow is expected to have minimum and average finance service cover ratios of 1.91x and 2.24x throughout the sukuk tenure. The cash flow projections can withstand the combined stress scenario of P99 energy production levels, O&M cost increase of 10% and plant outage increase of 3%.

Neo Xue Wei, +603-2717 2937/ xuewei@marc.com.my;
Lee Chi Han, +603-2717 2939/ chihan@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my.

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