Posted Date: June 08, 2017

MARC has assigned a preliminary rating of AA-IS to Quantum Solar Park (Semenanjung) Sdn Bhd’s (QSP Semenanjung) proposed Sukuk Murabahah of up to RM1.0 billion. The outlook on the rating is stable. This sukuk will be Malaysia’s first Green Sustainable and Responsible Investment (Green SRI) Sukuk to be issued by a solar power producer. QSP Semenanjung is a wholly-owned subsidiary of Quantum Solar Park Malaysia Sdn Bhd, with the latter’s ownership interest equally divided among ItraMAS Technology Sdn Bhd, MalTechPro Sdn Bhd and CamLite Sdn Bhd.

Proceeds from the proposed Green SRI Sukuk will be utilised to construct three 50-megawatt (50MW) alternating current solar photovoltaic (PV) power plants concurrently, one each in Gurun (Kedah), Merchang (Terengganu) and Jasin (Melaka) owned by QSP Semenanjung’s three wholly-owned project companies. With a combined capacity of 150MW, QSP Semenanjung will be the largest solar power producer in the country. The total project cost of about RM1.24 billion will be funded on an 80:20 sukuk-to-equity financing basis. The equity of about RM250.3 million will be injected in QSP Semenanjung before any of the project companies pay 90% of the amount payable under their respective engineering, procurement and construction (EPC) contracts or before any of the project company’s balance in the designated accounts falls below RM10 million. The equity portion is backed by a bank guarantee from a financial institution that carries a domestic rating of AAA/stable or its equivalent from a rating agency.

The rating primarily reflects the adequate projected cash flow coverage on the back of the 21-year solar power purchase agreements (SPPA) with Tenaga Nasional Berhad (TNB), on which MARC maintains a senior unsecured debt rating of AAA/Stable. The rating also considers the well-structured contract arrangements with respect to the EPC and operations and maintenance (O&M) of the plants. Moderating the rating are the risks associated with project completion, uncertainty around the solar irradiance estimates and overall plant performance.

The fixed-sum EPC contracts have been awarded to Scatec Solar Solutions Malaysia Sdn Bhd (Scatec Malaysia), a wholly-owned subsidiary of Scatec Solar ASA (Scatec). Scatec is a Norwegian-based solar power plant developer and operator of 322MW solar power generating capacity. QSP Semenanjung’s three solar plants are scheduled to achieve commercial operation date (COD) concurrently on December 31, 2017 upon completion of the 10-month construction programme. MARC has assessed the experience and credit profile of Scatec as adequate to undertake the projects although the construction timeline for the project in Jasin is deemed tight due to the longer duration required for site preparation. Nonetheless, the liquidated damages (LD) provisions under the EPC contracts and the procurement of insurance coverages for delays should address compensation payable to TNB and potential cash flow mismatches arising from any delays.

Upon commencing commercial operations, the project companies would receive stable cash flow streams under the SPPA terms which also include entitlement to payments in the event TNB is not able to accept the plants’ output. The O&M risk is mitigated by performance guarantee provisions under the 18-year O&M agreements (OMA) with Scatec Malaysia. The project companies are also covered by equipment warranties that are in line with acceptable industry standards. The inverter warranties will be procured for the term of the SPPAs. Additionally, a maintenance reserve which will be built-up to RM12.0 million progressively within the first 10 years will serve as a contingency for any maintenance requirements.

Key assumptions used in the cash flow projections’ base case include one-year P90 energy production levels, panel degradation at a rate of 0.4% per annum and annual escalation rate of 3% in O&M fees. The energy yield analysis has incorporated sufficient modelling of data uncertainty using high quality satellite meteorological data given the lack of ground data sources. Nonetheless, MARC believes that continuous and quality monitoring of on-site data collection during the operational phase is critical in reducing uncertainty in prospective solar irradiance estimates.

The project, based on the P90 resource probability scenario, is expected to have minimum and average finance service cover ratios (FSCR) of 1.56 times and 1.83 times respectively throughout the Green SRI Sukuk tenure. Project debt coverage is deemed satisfactory under MARC’s moderate stress scenarios which include a 4% project cost overrun, six-month delay in project completion or 20% increase in operating expenses. MARC also derives comfort that the project’s minimum FSCR is a commendable 1.48 times under a P99 resource probability scenario. Construction cost overruns are partly mitigated by the project sponsors’ undertaking to fund any additional project cost of up to RM50 million which is backed by a bank guarantee by a financial institution with a domestic rating of AAA. Providing some cash flow protection under stressed scenarios is the post-distribution FSCR covenant of 1.50 times throughout the proposed Green SRI Sukuk tenure. Cash commingling risks are mitigated through the tight payment waterfall structure and designated accounts controlled by the security agent.

The stable outlook reflects MARC’s expectation that the project will achieve scheduled COD within the allocated budget and the project sponsors will adhere to the pre-determined capital commitment and obligations under the financing structure. Upon successful commencement of operations, the rating may be revised upwards if the project manages to demonstrate that its actual energy output is able to meet or exceed the projected estimates.

Ng Chun Kean, +603-2717 2940/ chunkean@marc.com.my;
Yap Lai Ken, +603-2717 2947/ laiken@marc.com.my;
David Lee, +603-2717 2955/ david@marc.com.my.

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