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[Solar Energy Player Tadau Energy Plans RM250m Green Sukuk]

Oct 2017

Solar Energy Player Tadau Energy Plans RM250m Green Sukuk

Solar energy company Tadau Energy Sdn Bhd plans to issue up to RM250mil green sukuk and RAM Ratings has assigned a rating of AA3/Stable.

The ratings agency said on Thursday the proposed Islamic medium-term notes programme of up to RM250mil in nominal value is the first rated sustainable and responsible investment (SRI) sukuk to be issued by a solar power player in Malaysia.

Tadau has two 21-year power purchase agreements (PPAs) with Sabah Electricity Sdn Bhd (SESB) to design, build and operate solar photovoltaic (PV) plants with a total capacity of 50 MWac in Kudat, Sabah.

The scheduled commercial operations dates under the first agreement is June 30, 2017 and the second on March 31, 2018.

Tadau’s green sukuk framework has been certified by the Centre for International Climate and Environmental Research – Oslo (CICERO).

The rating reflects Tadau’s sturdy project fundamentals, underscored by its long-term PPAs, which require SESB to accept and purchase all energy generated by the Plants, up to a specified limit.

“This priority of despatch enjoyed by the company moderates the absence of fixed availability-based revenue typically earned by thermal power plants,” said RAM’s co-head of infrastructure and utilities ratings Chong Van Nee.

Chong pointed out the operational complexity of solar PV plants such as Tadau’s is lower than that of thermal power plants due to the absence of moving parts and a combustion function.

Tadau also faces a lower degree of construction risk compared to thermal plant operators as solar plants are easier to install in view of their modular structure, a basic operating system as well as a shorter completion timeframe, although the company is still exposed to topographical challenges.

“Construction-related risks have, in our view, been largely alleviated by the large contingency sum (12% of construction cost) set aside by Tadau, an additional three-month timing contingency that has been imputed to our cashflow sensitivities, as well as the fixed-priced, lump-sum turnkey engineering, procurement, construction and commissioning (EPC) contract with SPIC Energy Malaysia Sdn Bhd (SEM), whose contractual obligations are guaranteed by its parent, CPI Power Engineering Corporation Ltd (CPIPEC),” Chong said.

CPI Power Engineering Corporation’s track record of constructing and commissioning solar plants in China is viewed as adequate, although it has limited experience overseas.

Construction for unit one, a 2MW plant under PPA1, has been completed and the unit is currently undergoing the requisite tests.

Chong said even so, Tadau’s debt-servicing ability remains strong as the rating agency has imputed a three-month timing contingency in its sensitised cashflow analysis.

“We also derive some comfort from the reputable manufacturers engaged by Tadau to supply key plant components, such as JA Solar Holdings Co Ltd for mono-crystalline silicon PV modules and Huawei Technologies Co Ltd for string inverters.

“The rating is, however, moderated by the variability of solar irradiance and the performance ratio of the Plants, which determines the amount of electricity generated,” Chong added.

Solar irradiance is based on satellite data from SolarGIS while Tadau’s energy generation is forecasted using PVSyst software – both of which are widely used internationally.

Tadau is further exposed to the risk of a reduction in energy rates should there be savings in construction and financing costs.

The risk is moderated by the transaction structure, under which half of the cost savings (that is from any unutilised contingency sum in the disbursement account) would be deposited in a cost savings reserve account and excluded from the distribution covenant to ensure cash retention throughout the transaction’s tenure.

Based on RAM’s sensitised cashflow analysis, Tadau’s debt-protection metrics are envisaged to be strong, with respective minimum and average finance service coverage ratios (FSCRs, with cash balances, post-distribution and calculated on payment dates) of 1.50 times and 1.87 times throughout the transaction’s tenure.

“We expect Tadau to adhere to its distribution covenants in registering a distribution FSCR of at least 1.50 times on a forward-looking basis throughout the transaction’s tenure, as opposed to only in the year of assessment.

“Notably, there are seven years in which Tadau’s FSCR (without cash balances) will fall below one time, indicating some reliance on brought-forward cash,” Chong said.

Source:     20/10/2017

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