Jimah East fundraising postponed

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1MALAYSIA DEVELOPMENT BHD is putting on hold an RM8.4 billion debt-raising exercise for its 2,000mw coal-fired power plant Jimah East — a project that is crucial to the listing of its energy unit Edra Global Energy Bhd (formerly known as 1MDB Energy Group Bhd).

The group, through its subsidiary Jimah East Power Sdn Bhd, which is undertaking the project, was unable to complete the issuance of RM8.4 billion worth of sukuk arranged by AmInvestment Bank by end-November as originally planned.

Since the construction of the RM11 billion Jimah East has been delayed, as previously reported by The Edge, the group has time to explore other options to fund the project.

“There is no rush to complete the fundraising now that the construction of the project has been delayed by about six months at least. In fact, this could be a good thing as it will allow them [Edra Global] to re-evaluate their options — both the source of the funds and the financing structure,” explains a source.

The options include borrowings from the Japan Bank for International Cooperation (JBIC), which was taken off the table earlier this year after Japan’s Mitsui Co Ltd was forced to sell most of its 30% stake in the project to Tenaga Nasional Bhd.

Edra Global could not use JBIC financing because it requires a Japanese company to have at least a 20% to 25% stake in the project, so it switched to sukuk instead.

Tenaga will still be taking up to a 25% stake in the project and is currently conducting due diligence on the acquisition, say sources. However, it will be acquiring its stake from 1MDB instead of Mitsui, they add.

From 1MDB’s perspective, this means it will have a smaller stake in the power plant heading into the initial public offering of its energy unit, and will get less value from it in absolute terms. However, sources say this has improved relations with the Japanese, keeping the door open for collaboration in future projects.

However, it is probably more important that Edra Global does not over-leverage Jimah East, especially since it has a relatively low internal rate of return (IRR) — estimated to be less than 6%.

Power plants generate very strong and steady cash flow but their earnings do not grow much either. If a project’s gearing ratio is too high, it could end up working for the bank for the next 20 years with almost nothing left for shareholders, explains a source.

At the same time, Edra Global will want to ensure it secures the cheapest borrowings it possibly can, which is why management is said to be looking for more options.

The sukuk arranged by AmInvestment had an average profit rate of 6.27% and tenures ranging from 5½ to 23 years. It was also a bought deal with investment banks subscribing for the Islamic bonds and selling them later at a spread.

In comparison, back when Jimah East was known as Project 3B and put out to tender, the cost of debt submitted by the four bidders ranged from 4.09% to 4.45% based on documents seen by The Edge.

JBIC financing, which was used in 1MDB’s proposals in the tender stage, has certain drawbacks. Since the loans are in a foreign currency, there will be some element of foreign exchange risk or expensive hedging costs to mitigate the risk.

However, the fact that Edra Global opted for a bought deal subsequently suggests that the group was prioritising speed rather than cost. Bought deals tend to be much quicker to execute but investment banks charge a premium for holding the risk.

At the very least, Edra Global should be able to get a better price if it goes through a book-building exercise with institutional investors. After all, it managed to secure an AA-IS rating from Malaysian Rating Corp for the sukuk and Bond Pricing Agency Malaysia data shows that AA3-rated bonds (that are comparable) with a tenure of more than 15 years are trading at yields of around 5.6% at the most.

But bankers say the sukuk was unable to proceed because Edra Global could not meet certain terms put forth by the investment banks. According to them, Maybank Investment Bank was supposed to have subscribed for the sukuk as well since the issuance was too big for AmInvestment to take on alone.

It seems Maybank had conditionally agreed to accept about 25% of the bonds but had insisted on several terms — which could not be met — that included making the sukuk the most senior debt in 1MDB’s books. This means the sukuk’s holders would have first right to liquidated assets in the event of a default.

Edra Global is also applying to the Energy Commission for a six-month extension of the commercial operation date (COD) for Jimah East. Bankers say, as one of its terms, Maybank wanted the extension approved. This is because a delay exceeding six months in the construction of the power plant could trigger a technical default.

It is worth noting that failure to meet the COD could result in hundreds of millions of ringgit in liquidated ascertained damages to Tenaga.

Both investment banks have every right to be wary about lending to 1MDB and its associate companies because they have substantial exposure to the group that has over RM41 billion of debt in its books.

Maybank alone has an exposure of at least RM3.2 billion or 58.99% of the RM5.5 billion bridging loan to 1MDB that is supposed to be repaid post-listing. In fact, Maybank had to grant 1MDB an extension on RM2 billion of the bridging loan that was due to be paid on Nov 30.

Interestingly, the RM8.4 billion sukuk, had it gone ahead, was due to be issued on Nov 28. Meanwhile, the remaining RM3.5 billion of the bridging loan is due in 2024.

As for the listing of Edra Global, Jimah East continues to be a catalyst despite its low IRR because it is one of the most visible projects on the horizon for the group. So, if the power plant can be financed on better terms, it should be reflected positively in Edra Global’s IPO valuation.

This article first appeared in The Edge Malaysia Weekly, on December 8 - 14, 2014.