Singapore, July 25, 2017 — Moody’s Investors Service has assigned a Baa3 rating to the proposed backed senior secured USD notes of Minejesa Capital BV (MCBV) due 2030 and 2037 in two tranches. The proposed notes are unconditionally and irrevocably guaranteed by Paiton Energy (P.T.) (Paiton Energy), a related company held by the shareholders of MCBV in the same proportional shareholding.
The outlook on the rating is stable.
MCBV is a finance entity created by the shareholders of Paiton Energy. In tandem with the bond, MCBV will also raise a six-year amortizing bank loan facility. MCBV will transfer the proceeds from the USD notes and the bank loan facility to Minejesa Power BV, a wholly owned subsidiary in the form of share capital and/or loans. Minejesa Power will in turn on-lend the funds to Paiton Energy in the form of an intercompany loan.
Paiton Energy is the second largest independent power producer in Indonesia by installed capacity, with net installed capacity of 2,045MW, consisting of three operational coal-fired generating units. The first unit started operation in 1999 and the most recent unit in 2012.
The proceeds from the intercompany loan to Paiton Energy will be used to: (1) refinance the senior loan maturing in May 2027; (2) repay shareholder loans; (3) pay associated transaction costs; (4) make distributions to shareholders and (5) fund other corporate purposes.
Holders of the USD notes benefit from several structural features which establish a linkage between the credit profiles of Paiton Energy, MCBV and Minejesa Power. Such features include an irrevocable and unconditional guarantee from Paiton Energy and a collateral package comprising: (1) assets of Paiton Energy and accounts in the cash flow waterfall; (2) assignments by Paiton Energy of the operation and maintenance documents and insurances; and, (3) a pledge by Minejesa Power relating to intercompany loan receivables.
The collateral package is shared on a pari passu basis with bank lenders of the loan facility. Because of these features, the rating of MCBV is underpinned by Paiton Energy’s credit profile, which is consistent with a Baa3 rating.
“The Baa3 rating of the notes is supported by the revenue visibility provided by the long-term power purchase agreements and the cost competitiveness and operating track record of Paiton Energy,” says Ray Tay, a Moody’s Vice President and Senior Credit Officer.
Paiton Energy has a robust tariff structure that supports its rating, allowing for the recovery of capital costs and pass-through of foreign exchange and coal costs; thereby protecting its cash flow generating ability.
Furthermore, nearly half of the company’s revenues are derived from capacity payments; which translates into stable and predictable cash flow, while the ability to pass through costs provides a good degree of resilience to downside risk.
The rating also considers the investment grade credit profile of its sole offtaker, namely Perusahaan Listrik Negara (P.T.) (PLN; Baa3 positive).
At the same time, the rating is constrained by: (1) Paiton Energy’s moderate-to-high financial leverage; (2) high offtaker concentration and, (3) lower creditor protections when compared to other rated projects.
Paiton Energy has delivered a strong operational performance since its start up, and Moody’s expects that this situation will continue. The company has maintained average availability factors slightly above 90%, compared to average planned availability requirements in the power purchase agreements (PPAs) ranging from 79.7% to 85%. Moody’s expects that availability will continue to exceed PPA levels.
“The rating also takes into account our expectation of strong sponsor commitment and expertise, which will support measures to maintain Paiton Energy’s performance,” adds Tay.
In particular, Mitsui & Co., Ltd. ((P)A3 negative) — which is the largest shareholder, with a 45.5% stake — has a track record in supporting the project, especially during the aftermath of the Asian financial crisis in 1997-1998.
Moody’s expects that Paiton Energy will achieve an average debt service coverage ratio (DSCR) of between 1.4x and 1.6x during the debt amortization period between years 2018 to 2037, which is appropriate for the Baa3 rating level and compares well with similarly rated peers.
Like most other independent power companies in Indonesia, Paiton Energy’s credit exposure to PLN is significant. Specifically, PLN is Paiton Energy’s sole offtaker and source of revenue. Such exposure is mitigated by PLN’s investment grade rating of Baa3, with a positive outlook.
Moody’s considers that the project financing structure offers lower protection to creditors when compared with other similarly-rated projects, reflecting the fact that bondholders will not have security over shares in Paiton Energy, and the PPAs will not be assigned.
Nevertheless, creditors will benefit from the Powers of Attorney, which will allow the security trustee to effectively take control of Paiton Energy in the event of default and indirectly allow creditors to step into the position of Paiton Energy and therefore partially mitigate the weakness mentioned above. But, this is an uncommon mechanism in lieu of a share pledge.
The stable rating outlook reflects Moody’s expectation that Paiton Energy’s performance is unlikely to experience a material change over the next 12-18 months relative to Moody’s base case expectation.
Upward momentum in the rating is unlikely due to Paiton Energy’s projected financial metrics and dividend policy, which comprises 100% of distributable cash flow. Such a situation will keep the company’s DSCR levels in line with Moody’s expectations.
The rating could come under downward pressure if: (1) the projected financial metrics drops to levels that are below Moody’s base case expectation, including average DSCR falling consistently below 1.4x — 1.6x during the amortization period, potentially due to weaker operational performance that cannot be accommodated within the available contractual protections; (2) PLN’s credit rating is downgraded; and/or, (3) there is material shareholder changes and/or a reduced willingness and/or ability of the shareholders to provide support, potentially driven by a materially weaker credit quality.
The principal methodology used in these ratings was Power Generation Projects published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Paiton Energy (P.T.) is the second largest independent power producer in Indonesia. The company has a net installed capacity of 2,045MW, consisting of three coal-fired generating units (P7/8 and P3), with P7/8 (2 x 615MW) having commenced operations in 1999 and P3 (1 x 815MW supercritical) in 2012.
The coal-fired units are in the Paiton Power Complex, located in Probolinggo Regency, East Java, about 141km Southeast of Surabaya. The power complex consists of eight generating units in total.
Paiton Energy holds long-term power purchase agreements to sell electricity to Perusahaan Listrik Negara (P.T.). The agreements will end in 2042.
Paiton Energy is owned by Mitsui & Co., Ltd. (45.5%), Nebras Power Q.P.S.C. (35.5%), JERA Co., Inc. (14.0%) and Batu Hitam Perkasa Indonesia (P.T.) (5.0%).
Minejesa Capital BV (MCBV) is the issuer for the proposed USD notes. MCBV is owned by the same shareholders as Paiton Energy, with the same proportional shareholding. MCBV will transfer the proceeds to its wholly owned subsidiary, Minejesa Power BV and, Minejesa Power will in turn on-lend the funds to Paiton Energy as an intercompany loan.