RAM Ratings downgrades Telekosang Hydro One's Senior Sukuk to A1/Stable and Junior Bonds to BBB1/Stable

RAM Ratings has lifted the Negative Rating Watch on Telekosang Hydro One Sdn Bhd's (TH1 or the Issuer) RM470 mil ASEAN Green SRI Sukuk (2019/2037) (Senior Sukuk) and RM120 mil ASEAN Green Junior Bonds (2019/2039), concurrently downgrading the respective sukuk ratings to A1 (one notch from AA3/Negative) and BBB1 (two notches from A2/Negative). Both ratings carry a stable outlook.

TH1 owns and operates a 24 MW small hydro power plant (Plant 1) in Tenom, Sabah, while its sister company, Telekosang Hydro Two Sdn Bhd (TH2), owns and operates a 16 MW plant (Plant 2) at the same site.

Following our last rating update in September 2024, Plant 2 operations resumed in mid-November after an eight-month outage. Plant 1 operations were restored in August 2024. The timing of the recovery of outage insurance claims for the two plants is uncertain. The court hearing on an injunction obtained by the engineering, procurement, construction and commissioning (EPCC) contractors to halt the release of performance bond proceeds to the Issuer has been further delayed. As a result, the recovery of the proceeds sought by TH1 and TH2 remains unresolved.

In view of the unexpected plant outages and TH1's limited ability to access these contingent liquidity sources, RAM's downgrade actions reflect the Issuer's weakened debt-servicing ability, as measured by the Senior Sukuk's annual finance service coverage ratios, which are projected to converge to a minimum of 1.50 times in contrast with initial expectations of at least 1.65 times. The wider three-notch gap between the ratings of the subordinated Junior Bonds and the Senior Sukuk indicates lower available cash reserves due to outage losses. The Junior Bonds were structured as zero-coupon bonds, with repayments starting only in August 2038 and August 2039, after the Senior Sukuk is fully redeemed.

While we expect the Issuer toG