Malaysia reforms spook bond market


Malaysia's plans to reform its power sector have raised questions over power producers' access to long-term funding in Asia's biggest project bond market.

By Kit Yin Boey

SINGAPORE, Oct 11 (IFR) - Malaysia's plans to reform its power sector have raised questions over power producers' access to long-term funding in Asia's biggest project bond market.

The cabinet last month approved a 10-year power reform master plan, dubbed Malaysian Electricity Supply Industry (MESI) 2.0, with the aim of introducing competition at every level of the power industry to reduce costs for consumers.

This includes scrapping the current system of power purchase agreements with state-owned utility Tenaga Nasional, making cashflows far less predictable.

“For the longest time, the PPA has been an important factor behind the high-grade ratings that are given to the project financing bonds raised for greenfield projects,” said a DCM banker. “If there is no PPA, then we will have to look again at how greenfield or even brownfield power plants can raise funds in the market.”

Malaysian infrastructure projects, particularly those in the power industry, have long enjoyed access to long-term, fixed-rate funding in the ringgit bond market, both in conventional and Islamic formats.

The South-East Asian country hosts one of the largest project bond markets in the world, where investors are willing to take on construction, completion, regulatory and political risks.

Outstanding bonds from the power sector now total some M$47bn (US$11.4bn), about 10% of the M$474bn Malaysian corporate bond market, excluding government-guaranteed paper. Most power projects issue in Islamic format.

The master plan is not expected to threaten existing agreements, but future issuance from the sector is far from certain.

One key change in MESI 2.0 is a proposal to overhaul the agreements between independent power producers and Tenaga Nasional.

Under existing offtake pacts, Tenaga pays according to the level of availability of power at the plant, and not on how much it actually buys – a sore point among critics of the IPP structure. IPPs are also allowed to pass through their fuel costs to Tenaga in full.

Existing PPAs allow power producers to predict revenues and operating costs with confidence, which in turn makes principal and interest payments of the bonds easier to forecast.

MESI 2.0 calls for the introduction of variable and competitive capacity payments in shorter offtake agreements in the future. While this should allow an offtaker to buy from plants that can generate power at a lower cost, and thus, in theory, pass on savings to the consumer, it will increase risks for the generating company.

“With this change, future IPPs will be exposed to market and pricing risks,” said rating agency RAM in a note.


The government has pledged to honour all existing PPAs until the concessions expire. There are currently 25 long-term PPAs.

So far, bankers said there has been minimal impact on outstanding bonds and sukuk issued by the power sector, partly because of the government’s reassurance that it will honour outstanding contracts, and partly because the markets are still digesting the plans and waiting for more details.

There is, however, some positive news for IPPs. For one, they will be allowed to procure fuel from other suppliers, breaking a state duopoly of Tenaga Fuel Services and Petronas Energy and Gas Trading, which could help lower power production costs. This liberalisation will apply to existing IPPs as well, with the Energy Commission expected to offer supplementary agreements for the change as early as the first half of 2021.

MESI 2.0 will also open up Tenaga’s transmission and distribution system to third-party access, for which a framework is expected by end-2022. This will facilitate the deregulation of the power market, allowing retail competition and benefiting end-users.

The Energy, Green Technology, Science and Climate Change Ministry has indicated that it will not be awarding any new IPP licences for the moment, except for solar power plants, which it is pushing as part of its move towards renewable energy sources. This will allow it to comfortably lower a high electricity reserve margin of 30% to a targeted 25% aimed for by 2025.

(This story will appear in the October 12 issue of IFR Asia magazine Reporting by Kit Yin Boey; Edited by Steve Garton)

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