The Malaysian power market has offered limited opportunities for outsiders, whether debt or equity providers. The R6.7 billion ($2.16 billion) financing for the Tanjung Bin coal-fired plant offers a glimmer – and only a glimmer – of hope. The financing could spark follow-ups, but only if foreign exchange market conditions allow and if more developers with horizons beyond Malaysia pick up new projects.

The sponsor of the 1,000MW supercritical coal-fired plant is Malakoff, of which locally-listed MMC Corporation owns 51%. Malakoff has an installed capacity of 5,020MW, equivalent to a quarter of Malaysia’s generating fleet. It also owns stakes in four independent water and power projects in the Middle East and North Africa.

The new plant is located at the same site as an existing larger plant in in Johor, Malaysia. It is the result of the most rigorous bidding process ever for an independent power project in Malaysia. Earlier IPPs have been the result of proposals from developers, and the impressive returns in the sector have long been a cause for concern.

Malaysia’s power market has developed somewhat in isolation from the global project finance market. Tenaga has been able to denominate power purchase agreements in local currency because local lenders have been able to meet projects’ financing requirements. These agreements are usually less watertight than an international lender, particularly the more conservative sort of export credit agency, would prefer.

The Malaysian Energy Commission launched the bidding for new capacity in September 2010. Responses to the request for proposals arrived in in April 2011, and Malakoff was named preferred bidder in June. Malakoff, whose financial adviser was HSBC, benefited from having an existing site, but also carefully lined up its sources of financing, both foreign and domestic, during the bid, while preserving the ability to switch between them as circumstances permit.

The gap between the cost of Ringgit and dollar debt is not very wide, and only when cross-currency swap market conditions permit does dollar financing enjoy an appreciable advantage over domestic bonds. The swap market would also not be deep enough to place the entirety of a project debt package cost-effectively. Tenor is not normally an issue for domestic sponsors, thanks to a deep government-supported sukuk market. An ECA facility might rival a sukuk tenor, but its presence would probably have drawn out the financing

The engineering, procurement and construction contractor on the project is a joint venture of Alstom and local contractors Mudajaya and Shin Eversendai., with Alstom supplying a supercritical steam turbine and generator, and boiler, as well as mills and air-preheaters and environmental control systems. The plant will use low nitrogen oxide burners and seawater flue gas desulphurization, to minimise emissions concerns.

Supercritical technology is designed to operate at much higher temperatures than conventional coal plants, meaning that contractors and lenders have to pay more attention to the reliability of materials used in plants, but the plant is Alstom’s second in Malaysia, after the Manjung power plant. Alstom has been present in Malaysia since 1969, and the combination of its experience, Malakoff’s size and the Tenaga PPA was enough for the financing to earn an AA3 rating from the Ratings Agency of Malaysia.

The sponsor and its adviser were not running an either/or competition between ringgit and dollar debt, so much as working out what proportion of the overall package could be denominated in dollars given swap market conditions. Between December 2011, when the back to back PPA and coal supply agreement with Tenaga was signed, and February 2012, when the financing closed, a substantial, but not majority, offshore component made sense

The final RM5.4 million debt package included a $400 million (RM1.24 billion) foreign currency loan, larger than the RM700 million senior domestic currency loan, but much smaller than the project’s RM3.29 billion sukuk. Rounding out the financing is a RM1.3 billion sponsor-guaranteed equity bridge loan.

The lead arrangers on the sukuk were HSBC and Maybank, while CIMB, Affin, Bank Muamalat, OCBC and RHB also underwrote the bond. The bonds were issued a little after the deal signed, in March, and featured maturities of between five and 20 years, and profit rates of 4.45% to 6.05%.

The lead arrangers of the 12-year domestic senior loan were Maybank and RHB, and the equity bridge arrangers were Affin, CIMB, Maybank, RHB. The 15-year offshore debt arrangers were Mizuho, HSBC, BTMU, SMBC, and OCBC. The offshore group illustrates the lock that Japanese banks have on long-term debt in the current market, joined by adviser HSBC and OCBC, both of which have substantial banking operations in the country,

Since Tanjung closed there have been few signs that outside sponsors will gain a foothold in the Malaysian market. The two highest bidders for the 1,070MW Prai power plant were Tenaga, which is state-controlled, though listed, and in any case the plant’s offtaker, and a joint venture of state-owned 1MDB and Mitsui. Tenaga won the bidding after the lowest bidder – 1MDB/Mitsui – could not back its bid with a viable financing plan.

1MDB, which subsequently bought the operational Tanjong and Genting power portfolios, and Mitsui are again in the running for the 1,000MW fast track 3A power plant, and are up against a joint venture of Marubeni and Tenaga. 

Tanjung Bin Energy Issuer Bhd
SIGNED
February 2012,
sukuk issued March 2012
SIZE
RM6.7 billion
DESCRIPTION
1,000MW coal-fired supercritical power plant located in Johor, Malaysia
SPONSOR
Malakoff Corporation
DEBT
RM3.29 billion sukuk, RM700 million domestic loan, $400 million offshore loan, RM1.3 billion junior equity bridge
SUKUK MANAGERS
HSBC, Maybank (both also lead arrangers), CIMB, Affin, Bank Muamalat, OCBC, RHB
RINGGIT DEBT ARRANGERS
Maybank, RHB
RINGGIT JUNIOR DEBT ARRANGERS
Affin, CIMB, Maybank, RHB
OFFSHORE DEBT ARRANGERS
Mizuho, HSBC, BTMU, SMBC, OCBC
SPONSOR LEGAL COUNSEL
Shearn Delamore
LENDERS’ LEGAL COUNSEL
Clifford Chance and Albar and Partners
LENDER TECHNICAL AND ENVIRONMENTAL
Mott MacDonald
LENDER INSURANCE ADVISER
Aon