[RAM] RAM Ratings assigns preliminary AAA(s)/Stable rating to Sarawak Petchem's proposed Sukuk Wakalah
RAM Ratings has assigned a preliminary rating of AAA(s)/Stable to Sarawak Petchem Sdn Bhd’s (the Company) proposed RM6.0 bil Islamic Medium-Term Notes Programme (proposed Sukuk Wakalah).
The preliminary enhanced rating reflects the irrevocable and unconditional guarantee provided by the Company’s shareholders, Permodalan Satok Berhad and Sarawak Economic Development Corporation (SEDC), on a joint and several basis. The credit strength of the strongest obligor, SEDC, anchors the rating. SEDC’s credit profile reflects that of Sarawak, whose state implicit strength is rated AAA, the highest on the rating scale. This is premised on SEDC’s important role in promoting economic, industrial and social developments in the state.
Sarawak Petchem is tasked with undertaking the development of a methanol plant in Bintulu, Sarawak, which will have a production capacity of 5,000 metric tonnes (MT) per day (the Plant or the Project). The construction of the Plant, having commenced in 1Q 2021, is expected to be completed within 34 months by end-2023, with operations scheduled to start by 1Q 2024. The project cost of USD1.67 bil (or RM7 bil) will be financed by debt of USD1.33 bil (RM5.59 bil), consisting of the proposed Sukuk Wakalah and a USD-denominated term loan, and advances from SEDC of about USD334 mil (RM1.40 bil).
Excluding the guarantee, Sarawak Petchem’s credit profile considers its strong project fundamentals, backed by favourable arrangements with national oil company, Petroliam Nasional Berhad (Petronas). The supplier of natural gas for the Project, Petronas also provides technical support and expertise and will be the offtaker of the Company’s methanol products. The cost of Sarawak Petchem’s main input, natural gas, is tied to methanol prices net of freight charges under an agreement with Petronas, which offers the Company some protection against the volatile prices of methanol, a globally traded commodity.
We view Sarawak Petchem’s relationship with SEDC to be very close. Despite it having only a 30% stake in the Company, SEDC is heavily involved in its operations at board level. The joint and several guarantee provided by SEDC reinforces this link. Upon the Plant’s completion and commissioning, Sarawak Petchem is expected to be a key contributor to the earnings of SEDC and Permodalan Satok (investment arm of Yayasan Hartanah Bumiputera Sarawak), with which the Company likewise enjoys a close relationship.
Its stand-alone credit profile however, is moderated by the considerable construction risk exposure to the Company given the greenfield nature of the Project, exacerbated by pandemic-related disruptions. Mitigating this is the appointment of reputable contractors, Samsung Engineering Co Ltd and China Communications Construction (M) Sdn Bhd (CCCCM), under fixed-price lump-sum turnkey contracts for the construction of the Plant and a deepwater jetty facility. Samsung Engineering’s partner, Air Liquide Global E&C Solutions Germany GMBH, is an established provider of methanol technology globally and will license the use of its technology for the Plant. As at 25 February 2022, the construction of the Plant was ahead of schedule while the jetty was behind schedule.
Sarawak Petchem’s highly leveraged balance sheet is seen to be a credit negative. With the bulk of funding for construction financed by debt, gearing will peak at over 4 times during the construction period due to negative retained earnings before easing to a still-high 1.70 times-3.10 times in the five-year period after the completion of the Plant. On balance, Sarawak Petchem’s operating cashflow debt cover is projected to be in the mid-teen levels in FY Dec 2025 – the Plant’s first full year of operations – before improving to a healthy 0.20 times-0.30 times in the subsequent five-year period. Our sensitised scenario which assumes, among other factors, a flat methanol price of USD315/MT (10-year historical average: ~USD390/MT), indicates strong minimum and average finance service cover ratios (post-distribution, with cash) of 1.45 times and 1.76 times, respectively.
The offshore portion of the contract with Samsung Engineering which is priced in USD (49% of contract sum) and euros (21%) exposes Sarawak Petchem to foreign exchange movement. A portion of the contract with CCCCM is also denominated in USD. The Company remains susceptible to methanol price volatility, notwithstanding the arrangement with Petronas, as well as risks associated with a single project and output.
Karin Koh, CFA
(603) 3385 2508
Thong Mun Wai
(603) 3385 2522