[RAM] RAM Ratings affirms Manjung Island Energy's sukuk at AAA/Stable

RAM Ratings has affirmed the AAA/Stable rating of Manjung Island Energy Berhad's (MIEB) RM3.86 bil Islamic Securities (2011/2030) (Series 1) and the enhanced AAA(s)/Stable rating of its RM990 mil Islamic Securities (2011/2031) (Series 2). Series 2's enhanced rating reflects an irrevocable and unconditional corporate guarantee from Tenaga Nasional Berhad (TNB, sukuk rated AAA/Stable by RAM).

The affirmation of Series 1's rating is premised on our expectation that the debt servicing profile of TNB Janamanjung Sdn Bhd (TNBJ or the Company) will remain intact despite the ongoing outage at one of its power plants – the 1,010 MW coal-fired power plant known as Generating Facility 2 (GF2 or Unit 4) – and other operational setbacks. GF2 has been offline since 4 December 2023 due to damage sustained by the rotor and casing of its intermediate-pressure steam turbine. MIEB is a special-purpose vehicle established to raise funding for the construction of GF2, which sits adjacent to TNBJ's 2,070 MW Sultan Azlan Shah power plant in Perak (GF1) (collectively, the Plants). By virtue of a Purchase Undertaking between MIEB and TNBJ, RAM views both entities in aggregate from a credit perspective.

Since our last update in January 2024, TNBJ has been working on accelerating rectification works to bring Unit 4 back online by mid-November 2024 at the earliest although still not discounting possible repair delays which may lead to later resumption of operations in February 2025. While the root cause analysis is still underway, General Electric – the original equipment manufacturer – has commenced necessary repairs in Germany. We understand that the Company has taken preventive measures to help address the issue.  

Assuming GF2 resumes operations only in February 2025, we foresee the Company's debt servicing metrices remaining superior, with respective minimum and average finance service coverage ratios (FSCRs, with cash balances) of 1.70 times and 4.19 times throughout Series 1's tenure. At its weakest, the FSCR is projected to fall to 1.70 times only in November 2025 under our stressed assumption due to lower cash balances after meeting sukuk dues. Excluding Series 2 profit payments, the annual FSCRs (as prescribed under the Trust Deed) would be at least 2.35 times. Series 1 is backed by a 12-month standby letter of credit procured by TNB, TNBJ's ultimate parent. Series 2 is structured with a RM990 mil bullet principal repayment on 25 November 2031 (after full redemption of Series 1). 

All said, we remain cautious of potentially higher than expected rectification costs or prolonged GF2 repairs which may require TNBJ to call on the corporate guarantee as early as November 2025 – although management is of the view that this is unlikely to occur and that calling the guarantee would be a last resort after exhausting all other options. In the immediate term, TNBJ's robust debt servicing metrices are underpinned by healthy cash holdings of RM800 mil as at end-March 2024 against the RM180.4 mil of scheduled obligations for both sukuk series in the next 12 months. In any case, the Company will continue to preserve its cashflows to fully meet Series 2 repayments, as seen in the past.

As per the terms of its power purchase agreements (PPAs) with TNB for GF1 and GF2, the Company is entitled to full available capacity payments (ACPs), subject to operating within PPA parameters, irrespective of the quantum of electricity generated. TNBJ also receives energy payments by way of a fuel cost pass-through mechanism. However, TNBJ has a history of volatile operational performance. Prior to GF2's shut down, the Plant faced numerous operational challenges such as persistent boiler tube leakages and a 42-day breakdown of Unit 4 owing to issues with restarting the unit after maintenance. Such operational setbacks, compounded by steeply declining coal prices, prevented TNBJ from fully passing through fuel costs in fiscal 2023. As a result, the Plant's rolling unscheduled outage rates of both GF1 and GF2 continued to breach the PPA-stipulated limit of 6%, causing the Company to record RM158 mil and RM277 mil of ACP losses in FY Dec 2022 and FY Dec 2023, respectively (11% and 23% of full ACPs). 

Given substantial ACP losses, falling coal prices and the inability to pass through fuel costs, the Company recorded its first ever pre-tax loss in fiscal 2023 (RM622.4 mil; fiscal 2022: pre-tax profit of RM415.2 mil), which continued into 2M fiscal 2024 (pre-tax loss of RM63.1 mil). As high repair costs persist in the absence of GF2 inflows, we expect TNBJ's loss position to continue until Unit 4 comes back online in 2025 (as assumed under RAM's stressed analysis).

In RAM's view, TNBJ remains exposed to regulatory and single-project risks, like other independent power producers. As coal-fired power plants are the focal point of the government's carbon reduction policies, RAM is of the view that the Company may have to contend with tighter environmental regulations in the future. In the long term, coal plants will increasingly face challenges in obtaining financing or insurance support.

 

Analytical contacts
Seri Nuralya Munawir 
(603) 3385 2484
nuralya@ram.com.my

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

Media contact
Sakinah Arifin
(603) 3385 2500
sakinah@ram.com.my