Posted Date: 28 January, 2022
MARC Ratings has placed its rating of AA-IS on UiTM Solar Power Sdn Bhd’s (UiTM Solar) outstanding RM202.3 million Green SRI Sukuk on MARCWatch Negative. UiTM Solar owns and operates a 50MW solar plant in Gambang, Pahang. The rating agency had on November 26, 2021, highlighted that the plant became non-operational due to unexpected damage of its gas-insulated switchgear and power transformer.
The MARCWatch negative placement reflects our concerns on the uncertain timing of when the plant will be fully operational. While the investigation on the root cause is still ongoing and is being undertaken by TNB Labs Sdn Bhd, the company has purchased a new transformer and ordered a switchgear from the original equipment manufacturer to replace the damaged equipment. The installation of the replacements along with additional civil works to strengthen the foundations are expected to be completed and operations to be resumed by early-May 2022. Nonetheless, the process may entail implementation risk; any changes to the company’s timeline would weigh on liquidity and cash flow coverage.
UiTM Solar is projected to incur equipment costs of RM7.5 million and revenue losses of RM15.6 million, totalling RM23.1 million. This is expected to be mostly covered by insurance proceeds of up to RM20.0 million, depending on the results of the root cause investigation expected by end-March 2022. MARC Ratings also notes that UiTM Solar may be subject to a non-delivery payment penalty of up to RM3.0 million for not meeting its power purchase agreement’s minimum energy delivery requirement. The shortfall is buffered by UiTM Solar’s liquidity position (cash and cash equivalents of RM36.5 million as at end-2021) as well as shareholder’s guarantee of RM23.0 million to meet shortfalls in the finance service reserve account.
The MARCWatch placement would be resolved upon completion and full resumption of plant operations. However, the rating could be downgraded upon upliftment in the event of significant weakening of key project metrics from initial projections.