[RAM] RAM Ratings assigns preliminary AA3 rating to Solar Management (Seremban)'s proposed ASEAN Green SRI Sukuk

RAM Ratings has assigned a preliminary AA3/Stable rating to Solar Management (Seremban) Sdn Bhd’s (SMS or the Company) proposed RM260 mil ASEAN Green SRI Sukuk (2020/2038) (the Proposed Sukuk). The Company’s Green Sukuk Framework has been reviewed by RAM Sustainability Sdn Bhd. Under a 21-year Power Purchase Agreement (PPA) with Tenaga Nasional Berhad (TNB), SMS has been contracted to design, construct, own, operate and maintain a solar photovoltaic (PV) plant with a capacity of 50 MWac (the Plant or the Project) in Rembau, Negeri Sembilan. The Plant achieved its commercial operations date (COD) on 30 January 2019.

The preliminary rating reflects SMS’s sound project fundamentals, underscored by the favourable terms of its PPA. TNB (AAA-rated by RAM) is obligated to purchase energy generated by the Plant up to a specified limit, thereby moderating the absence of fixed availability-based revenue. Despite some teething issues, the Plant has been able to establish a respectable operating track record with equipment from reputable manufacturers. The Company’s projected debt coverage is deemed strong, anchored by its predictable cashflow. Moreover, the operations and maintenance (O&M) of the Plant, which we consider as straightforward, are supported by the O&M service provider, Mattan Engineering Sdn Bhd (Mattan).

The abovementioned strengths are, however, tempered by uncertain solar irradiance forecasts, legal risk arising from the pending land-conversion from agricultural to industrial status and exposure to single-project and regulatory risks.

Similar to other solar PV plants, variability of solar irradiance is a key risk factor for the Plant. As such, our sensitivity analysis assumes a lower level of electricity output with higher outages and panel degradation. Meanwhile, the leased land on which the Project is situated has yet to be converted from agricultural to industrial status. Failure to convert could result in fines or forfeiture. That said, we draw comfort from the relevant authorities’ supportive actions and that the requisite land conversion premium has been pre-funded by the issuance proceeds from the Proposed Sukuk. 

Except for some teething issues related to serial defects of the fuses in its combiner boxes and a soil sinking issue, which have since been rectified, the Plant has demonstrated a healthy net electrical output (NEO) profile. It exceeded its declared annual quantity (DAQ – the forecast provided to TNB at the start of each year) by 9.8% between September 2019 and June 2020. Even during the height of its earlier operational glitches between April and August 2019, the Plant’s NEO was only 5% short of its seasonally prorated DAQ – well within the PPA’s performance requirements. The temporary setback has since been fully rectified and is not expected to recur, as concurred by the project’s independent technical advisers.  

Based on RAM’s stressed scenario, SMS’s debt-servicing metrics is deemed strong, as reflected by its respective minimum and average annual finance service coverage ratio (FSCR, with cash balances) of 1.50 and 1.73 times throughout the tenure of the Proposed Sukuk – which are commensurate with its AA3 rating. Our sensitised cashflow analysis assumes lower energy output due to more unforeseen outages and degradation, heftier operating expenditure. 

The Plant had been completed via a fixed-price, lump-sum turnkey contract with Mattan, and is one of the winning projects under the first cycle of Malaysia’s large-scale solar competitive bidding programme. SMS uses polycrystalline PV modules manufactured by Hanwha Q Cells Malaysia Sdn Bhd, and central inverters produced by Sungrow Power Supply Co Ltd. Both are reputable and financially stable companies. The Company relies heavily on Mattan’s expertise, via an 18-year O&M Agreement. Mattan has been in the renewable energy sector since 2012 and has experience with more complicated technologies such as biogas projects. That said, its prior experience in O&M of solar plants had involved smaller-sized projects.

The Proposed Sukuk, equivalent to 80% of the total project cost, is to refinance SMS’s existing loan facility and shareholders’ loans to fund the construction of the Plant. SMS is a wholly owned subsidiary of Solar Management (Chembong) Sdn Bhd, which in turn is equally held by two individuals, Tee Cheng Hua and Rokiyati Binti Jumali. Tee and his family are primarily involved in the palm oil plantation business. 


Analytical contact
Yip Chee Meng
(603) 3385 2516
cmyip@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my