SINGAPORE, June 7 (IFR) – Telekosang Hydro One is set to launch the world’s first Green sukuk to fund small-scale hydropower projects next month, burnishing Malaysia’s credentials as the world leader for Islamic project bonds.
Telekosang will raise up to M$590m (US$143.2m) in senior and junior sukuk with tenors of four to 20 years under the wakalah bi-al-isithmar concept. MIDF Amanah Investment Bank is sole principal adviser and lead arranger, as well as joint lead manager with Bank Islam.
The mini-hydro financing is aligned with Malaysia’s framework for sustainable and responsible investment sukuk, and with the ASEAN Green bond standards, which are based on the International Capital Market Association’s Green bond principles.
The efforts paid off in July 2017 when Tadau Energy sold the country’s first Green Islamic project bond – a M$250m multi-tranche transaction to finance a 50MW solar power project. In October 2017, Quantum Solar Park Semenanjung raised M$1bn in Green SRI Islamic bonds to fund the construction of three 50MW solar power plants, combining the assets in a single deal that promised economies of scale for the borrower and greater liquidity for investors. But severe delays to the completion of two of Quantum’s plants have clouded investor sentiment, especially towards Green bonds to fund greenfield projects.
Bankers are thus hopeful that a successful financing for two mini-hydro projects will reopen the market for Green project bonds in Malaysia.
The Telekosang project comprises two small plants with a combined installed capacity of 40MW to maximise economic and financing resources. A 24MW plant will be built, operated and managed by Telekosang Hydro One (TH1), which will also be the sukuk issuer, while another 16MW plant will be built, operated and managed by Telekosang Hydro Two (TH2). Both plants will be built on Sungai Telekosang in the Sabah state on a run-of-river scheme, which means no dam will be constructed, and hence no flooding of the area will be necessary.
WATERTIGHT STRUCTURE
Total project costs are estimated at M$587.5m, which will be about 80% funded by senior bonds and the balance by junior bonds and redeemable preference shares. Bookbuilding of senior bonds for up to M$470m is expected to launch in mid-July, while the junior bonds will be offered to Telekosang’s sponsors as zero coupon notes. RAM has rated the senior sukuk AA3 and the junior sukuk A2. The terms of the preference shares have not been disclosed.
A contingency sum amounting to 6% of the turnkey contract, a three-month construction period buffer and a fixed-priced, lump-sum contract with Sinohydro and its parent Power Construction Corporation of China will provide more comfort to investors. There is also a minimum finance service coverage ratio of 1.25x.
The project is jointly owned by Senja Optima, a privately owned hydropower developer, and Inno Hydropower, a subsidiary of Yayasan Sabah Group, a foundation owned by the Sabah state government. The two plants have 21-year power purchase agreements with sole offtaker Sabah Electricity.
The Climate Bonds Initiative regards hydropower projects as important in the transition to a low-carbon economy with significant energy storage potential and an established, renewable source. Mini-hydropower projects with capacities of 50MW and below are perceived to have a far smaller carbon footprint than their large-scale peers, and development of such mini-hydro plants has taken off around the world.
The smaller hydropower plants have also attracted critics, who argue that the cumulative environmental impact of a proliferation of small projects, such as the fragmentation of a river system, may be not worth the benefits from a relatively small amount of power.
Nevertheless, the Telekosang project has received a Tier-1 environment benefit ranking from RAM Consultancy Services to recognise its contribution to a low-carbon future.
