RAM Ratings: Renewables driving power sukuk issuance, supportive of national green agenda

RAM Ratings maintains its stable outlook on the Malaysian power sector amid the impending liberalisation of the industry in Peninsular Malaysia. Tenaga Nasional Berhad (TNB) and Sarawak Energy Berhad – both rated AAA/Stable – continue to exhibit healthy operational and financial profiles. Sabah Electricity Sdn Bhd (not rated) also boasts a strong financial position, underscored by the Government’s solid support. The sector’s still-supportive regulatory landscape helps uphold the credit strength of the vertically integrated utility companies and independent power producers (IPPs) within their jurisdictions.

The main highlights of RAM’s latest publication, Malaysian Power Sector: Long road to liberalisation, include the following:

• Power industry masterplan promotes market efficiency.

• Reforms credit neutral to TNB and existing IPPs, new risks for future projects.

• Goal of 20% renewable energy (RE) mix to complement fossil fuel-powered generation.

• Malaysian sukuk market still the main funding source.

• Innovative financing structures facilitate access to sukuk market.

With a five-year average annual issuance of about RM8.4 bil for 2015-2019, the power industry is one of the most active sectors tapping the domestic bond market. Outstanding power bonds and sukuk summed up to some RM65 bil as at end-January 2020, equivalent to about 9% of Malaysia’s total outstanding corporate bonds. Mirroring the Government’s agenda, the power sukuk market was driven by RE projects in 2019. While the facility sizes are much smaller than those of conventional power projects, the RE segment has been driving Malaysia’s Sustainable and Responsible Investment (SRI) sukuk market.

RAM has rated numerous prominent firsts in the SRI sukuk market along with innovative financing structures that have involved the pooling of multiple plants that enable smaller IPPs to successfully tap the market. “As the award of RE projects become more competitive, we expect financing structures to evolve to help bridge the funding needs of RE producers. That said, the key considerations of sound project economics backed by strong counterparties and robust cashflow matching are still critical to our credit analysis,” explains Chong Van Nee, co-head of Infrastructure and Utilities Ratings.

RAM’s Industry Insight, entitled Malaysian Power Sector: Long road to liberalisation, is available for download at www.ram.com.my.

Copyright Press Releases 2020