[RAM] RAM Ratings places Sepangar's AA1 rating on Negative Rating Watch

RAM Ratings has placed Sepangar Bay Power Corporation Sdn Bhd’s (Sepangar or the Company) RM575 mil Nominal Value Sukuk Murabahah (the Sukuk) rating of AA1 on Rating Watch with a negative outlook. 

Sepangar operates a 100 MW combined-cycle gas turbine power plant in Kota Kinabalu, Sabah (the Plant). The Rating Watch reflects our concerns over likely breaches in meeting finance service reserve account (FSRA) balance requirements, potentially materialising as early as January 2025 following an unexpected depletion of the Company’s cash reserves. Our sensitised analysis indicates that if the potential shortfall is not addressed in time, the Sukuk’s credit profile will be permanently impaired, with projected finance service coverage ratio (FSCR) to fall below the 1.80 times threshold required to maintain the AA1 rating. The Company recorded an FSCR of 1.47 times on the latest sukuk payment date of 3 July 2024, against our previous expectation of 1.81 times. 

Operationally, the Plant continued to deliver a strong performance over the review period, achieving an average 12-month rolling equivalent availability factor (EAFr) of 94% – well above the 87% required by the power purchase agreement (PPA) – and operating within PPA-stipulated heat rates. As a result, the Company continued to earn full capacity payments in FY Dec 2023 while passing through fuel costs to Sabah Electricity Sdn Bhd, its sole offtaker. 

Nevertheless, pre-financing cashflows fell 57% y-o-y to RM17.06 mil in FY Dec 2023 (fiscal 2022: RM39.77 mil), with cash reserves significantly lower at RM31.67 mil against a projected RM54.75 mil. Sepangar attributed this to substantial (one-off) payments made to trade creditors, which saw the Company’s payables reduced by as much as five-fold over the same period. Management represented that the said payments were primarily due to full settlement of fuel costs and O&M fees. Sepangar’s 1H fiscal 2024 pre-financing cashflows have since normalised. As at 3 July 2024, cash reserves stood at RM21.88 mil. 

Sepangar is projected to achieve a pre-financing cashflow of RM42.25 mil over the next 12 months. This combined with available cash reserves should enable the Company to meet RM44.19 mil of sukuk obligations due in the next year, though without additional cash buffers, the Company will breach FSRA balance requirements in January 2025. 

We understand that Sepangar is currently undertaking a refinancing exercise for the early redemption of the Sukuk (ahead of scheduled maturity in July 2026), which could conclude within the next few months. Failing which, and in the absence of other financial restitution plans, a rating downgrade may be imminent to reflect the impaired debt coverage. 

We expect the Rating Watch to be resolved within the next few months, pending the progress and outcome of the refinancing exercise. RAM’s Rating Watch highlights a possible change in an issuer’s debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under RAM’s special surveillance. In a broader sense, the Rating Watch covers any event that may result in changes in risk factors relating to the repayment of principal and interest. 

Issues are put on Rating Watch when some of the abovesaid events are expected to or have occurred. The Rating Watch, however, does not mean that the rating will inevitably be changed. It only means that RAM is evaluating the rating and a final affirmation is pending. A “positive” outlook indicates that a rating may be raised while a "negative" outlook indicates a possible downgrade. A “developing” outlook refers to unusual situations in which future events are so unclear that the rating may potentially be raised or lowered. 


Analytical contacts
Chew Chiang Lim        
(603) 3385 2516                    
chianglim@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