The M$11.58 billion ($2.72 billion) financing for the 2,000MW Track 3B coal-fired plant in Malaysia represents the largest project financing in Asia year-to-date, the largest sukuk financing globally year-to-date, the largest ever independent power producer (IPP) financing in Malaysia, and the largest ever greenfield project bond financing in the power sector.

This is all in spite of the project’s difficult start having previously been awarded to 1MDB before the Malaysian investment fund was wound down and sold the development rights to Tenaga Nasional (TNB). That TNB along with its consortium partner Mitsui was able to close such a large financing in such a short-time frame is a testament to the sophistication of Malaysia’s capital markets for the financing of major infrastructure concessions.

1MDB’s woes

Project 3B, also known as the Jimah East power station, is a proposed 2,000MW coal-fired power plant in Jimah, Malaysia. Malaysia’s Energy Commission awarded the project to a consortium comprising 1MDB (70%) and Mitsui (30%) in March 2013 following a competitive tender and based on a levelised tariff rate of M$0.2533 per KWh.

The Energy Commission’s decision to award the project to 1MDB ahead of a rival offer from YTL Power Corporation was controversial since YTL was said to have offered a lower levelised tariff rate for the project. The Energy Commission later issued a clarification of its decision to award the project to 1MDB stating that YTL’s offer did not comply with the technical specifications of the request for proposals.

1MDB and Mitsui initially planned to finance the project using a mixture of US dollar loans, Malaysian ringgit loans and a ringgit bond issuance, which was to be anchored by the Japan Bank for International Cooperation (JBIC), although when JBIC pulled out of the deal, the sponsors scrapped plans for a dual currency financing and opted for a sukuk issuance instead.

1MDB has since been bogged down by indebtedness and accusations of impropriety and after flirting with default on bank loan, Malaysia’s Prime Minister Najib Razak installed Abu Dhabi Commercial Bank veteran Arul Kanda as the new chief executive earlier this year, who immediately announced plans to wind down the fund and cease investing in new projects.

TNB Takeover

In July TNB signed an agreement to acquire 1MDB’s shares in Jimah East Power, the project company that owns the rights to develop the 3B power project. The acquisition was for a total cash consideration of M$46.98 million. TNB shortly afterwards appointed HSBC and CIMB as lead arrangers and Maybank as lead manager for the sukuk issuance.

The sponsors signed the financing in November and closed the 36-tranche M$8.98 billion sukuk issuance last week, which comprised M$5.25 billion private placement tranches and M$3.73 billion publicly issued tranches. The tenor of the debt facilities ranges between 5.5 years and 23 years, and carries a coupon rate between 4.98% and 6.76%.

The transaction was well received from a broad range of investors including banks, which accounted for 28% of the total investor base, government agencies (27%), insurance companies (27%), asset management companies (17%) and corporates (1%). The publicly issued tranche was 2.9x oversubscribed allowing the issue to be priced inside the initial guidance.

The financing also includes M$2.6 billion in equity, which is 92% back-ended after full utilisation of the sukuk murabahah and is based on the respective sponsors’ shareholdings in the project company. Under the base case projections the project is expected to generate minimum and average debt service coverage ratios of 1.57x and 1.77x.

Malaysian market

Notwithstanding the fact that the deal was launched late in the year, the sponsors were able to walk away with a competitive debt package, priced towards the tight end of guidance and with a flexible debt maturity profile. The deal is a testament to the sophistication and depth of Malaysia’s capital markets and is illustrative of the local demand among investors for high-quality infrastructure assets.

One unintended consequence of the change in ownership of the project has been that the commissioning date for the project has been postponed until December 2019. This has meant that Tenaga in its function as state-owned utility has had to extend existing power purchase agreements with several IPPs to cover the shortfall in energy supply before 3B comes online.

This has prompted the Energy Commission also to eschew open tenders for several recent power concessions in favour of direct negotiations on the basis that the projects will be able to come online earlier. Given the lack of transparency surrounding the process, this development has triggered opposition. Regardless of this fact, 3B shows the breadth of financing available for IPPs in Malaysia.