[RAM] RAM Ratings assigns preliminary AA3 rating to Ranhill Solar Ventures' proposed sukuk of up to RM310 mil

RAM Ratings has assigned a preliminary AA3/Stable rating to Ranhill Solar Ventures Sdn Bhd’s (the Issuer) proposed Sukuk Murabahah Programme of up to RM310 mil (2022/2042) (the Proposed Sukuk).

Figure 1: Ranhill Utilities’ simplified corporate structure

Source: Ranhill Solar Ventures

Ultimately wholly owned by Ranhill Utilities Berhad, Ranhill Solar Ventures was set up to raise financing for two power projects and support their general corporate purposes, including shareholder distributions. The two projects are Ranhill Solar I Sdn Bhd’s 50 MW greenfield solar photovoltaic plant in Bidor, Perak (the Solar Plant) and Ranhill Powertron Sdn Bhd’s 190 MW combined-cycle gas turbine power plant at Kota Kinabalu Industrial Park, Sabah (the Gas Plant). Its Gas Plant is presently already fully operational. Ranhill Solar I and Ranhill Powertron will be collectively referred to as the Project Companies, and their power plants as the Plants (Figure 1).

The Proposed Sukuk will be issued in three tranches over next five years, with an initial RM145 mil (Tranche 1) earmarked for the development cost of the Solar Plant in August 2022. A subsequent RM77 mil (Tranche 2) is expected to be issued in the following month to support Ranhill Powertron’s convertible unsecured loan stock redemptions and dividend payments. The final Tranche 3, projected in 2027, will be spent on Ranhill Powertron’s capital expenditure. Subsequent issuances are contingent on several conditions, including confirmation that its rating will be maintained at a minimum of AA3 as well as approval from Ranhill Powertron’s minority shareholder (Sabah Energy Corporation Sdn Bhd) for the execution of this financing structure and the relevant security arrangement. RAM expects to reassess the transaction’s cashflow adequacy and debt servicing ability when details are made available to us then. Presently, RAM’s rating assessment for the Proposed Sukuk focuses on the Issuer’s repayment profile for Tranches 1 and 2.

The preliminary rating reflects the Project Companies’ sturdy project fundamentals, underscored by the favourable terms of their power purchase agreements and low offtaker risk. The Gas Plant has a sterling track record. Save for occasional hiccups, it has consistently earned full availability-based capacity payments and passed on all fuel expenses to its offtaker, Sabah Electricity Sdn Bhd. The Solar Plant enjoys priority of dispatch from Tenaga Nasional Berhad (whose sukuk is rated AAA/Stable) – its offtaker – which shields it against any demand risk. The straightforward nature of the Solar Plant’s operations, coupled with standard equipment warranties extended by reputable manufacturers, anchors the facility’s steady operating cashflow post-completion.

The Solar Plant’s exposure to pre-completion risk, however, is a key factor moderating the rating in the near-term. Industry-wide labour shortages, the more pronounced climate change risks as reflected by the higher frequency of extreme weather events, and the lingering effects of Covid-19 may contribute to construction challenges. In this regard, we derive comfort from the engagement of experienced contractors under fixed-priced turnkey agreements and the project’s satisfactory time and cost contingencies, along with standard insurance coverage.

Our stressed cashflow projection assumes a close to 30-month construction period for the Solar Plant (with a commercial operation date of 31 March 2024), lower plant availability and energy output as well as heftier operating expenditure. Ranhill Solar Ventures’ debt servicing metrics are nevertheless expected to remain strong and in line with the rating. The Proposed Sukuk is structured with an uneven repayment profile, resulting in the transaction being reliant on brought-forward cash balances to meet its periodic payment obligations for multiple periods. That said, the risk of cashflow leakage is moderated by its transaction structure with transparent cashflow waterfall distributions, independent management over key designated accounts, limitation on expenses and stringent distribution covenants imposed.

Overall, considering a consolidated cash position, our stressed analysis still shows a strong minimum consolidated annual FSCR (with cash balances, post-distribution) of 1.58 times (base case: 1.52 times). The better stressed FSCR reflects our expectation that the Issuer will maintain higher cash retention to ensure continued compliance with its financing covenants. Even if Tranche 2 were to be delayed, our sensitivity analysis shows that cashflows from the Solar Plant will be able to support Tranche 1 repayment commensurate with a AA3 risk profile.


Analytical contacts
Chu Jia Ying
(603) 3385 2519
jiaying@ram.com.my

Chong Van Nee, CFA
(603) 3385 2482
vannee@ram.com.my