[RAM] RAM Ratings closely monitoring legal dispute between reNIKOLA Solar II's Project Companies and EPCC Contractors

RAM Ratings is closely monitoring developments regarding a recent arbitration involving the Engineering, Procurement, Construction and Commissioning (EPCC) Contractors (China Machinery Engineering Corporation, China Machinery & Equipment (HK) Co. Ltd., China Machinery International Engineering Design & Research Institute Co. Ltd., and Mattan Engineering Sdn Bhd) and the Project Companies  (RE Kuala Muda Sdn Bhd - formerly known as BGMC Bras Power Sdn Bhd and RE Machang Sdn Bhd – formerly known as Idiwan Solar Sdn Bhd).

reNIKOLA Solar II Sdn Bhd is the Issuer of the RM390 mil ASEAN Green SRI Sukuk Programme (2023/2041) (last rated AA2/Stable on 27 September 2023); its Project Companies manage and operate a 30MWac solar PV plant in Kuala Muda, Kedah and a 30MWac solar PV plant in Machang, Kelantan.

Both plants achieved commercial operations on 22 March 2022 and on 5 April 2023, respectively, though delayed from the EPCC contracts’ guaranteed completion dates of 14 September 2020. As a result of the delay beyond the scheduled commercial operations date under the Power Purchase Agreements, the Project Companies paid RM10.2 mil in liquidated damages (LDs) to TNB. These payments did not adversely impact the transaction’s cashflow, although the LD receipts from the EPCC Contractors are yet to be received.

On 24 July 2023 and 14 September 2023, RE Kuala Muda Sdn Bhd and RE Machang Sdn Bhd claimed RM41.9 mil and RM42.6 mil, respectively, for delay LDs and performance LDs from the EPCC Contractors. However, on 14 February 2024, the EPCC Contractors issued a notice of arbitration to the Project Companies contesting the Project Companies' claim of RM84.5 mil. Concurrently, the EPCC Contractors submitted a counterclaim of RM68 mil for outstanding sums, losses, and expenses owed by the Project Companies. While RM66.3 mil of the claims submitted by the Project Companies can be covered by performance bonds, we note that the EPCC Contractors obtained an ad-interim injunction on the performance bonds.

Until these disputes are resolved, RAM would be unable to ascertain the potential credit implications for the Sukuk, given the undetermined costs that may result from the legal action. As such, the Sukuk’s rating remains status quo for now. The Project Companies’ solicitors have confirmed the Project Companies’ legal rights to withhold any outstanding payments to the EPCC Contractors until the arbitration concludes. RAM’s cashflow projections do not account for any LDs recovery or unexpected cash outflows related to these developments. We will continue to monitor these developments closely and provide the necessary updates to the market when more information is available.

Analytical contacts
Zachary Tan
(603) 3385 2612

Chong Van Nee, CFA
(603) 3385 2482