Moody's rates Tenaga credit negative on debt in GMR deal

The proposed transaction is credit negative for Tenaga Nasional Berhad because it will reduce the company's liquidity

Malaysian electricity investor Tenaga Nasional Berhad has been given a negative credit by Moody's rating agency on its funding and debt position following the firm's May agreement to acquire 30% stake in India's GMR Energy Ltd.

The proposed transaction is credit negative for Tenaga because it will reduce the company's liquidity and, depending on the funding mix, increase its adjusted debt.

Tenaga is to pay $300 million for the stake in GMR, which is its second acquisition in the past two months, the first being its $255 million purchase of GAMA Enerji A S (unrated) in Turkey.

"Assuming that the investment is fully debt-funded, we expect Tenaga's ratio of retained cash flow (RCF) to debt to be around 23% for the fiscal year ending 31 August, 2016, pro forma for the two transactions, versus 25% without them," said the credit agency.

"This ratio level is still within our quantitative guidance of 17-25% for Tenaga's rating, but the additional debt used to fund the acquisitions will reduce headroom. Also, Tenaga's RCF/debt ratio does not include debt at GMR Energy, the amount of which Tenaga has not disclosed," noted Moody's.

With these acquisitions, Tenaga aims to expand its business and reduce its overall exposure to Malaysia, which currently contributes nearly 100% of its revenues.

Following its agreement to acquire GMR Energy stake, Tenaga's presence overseas will include associate and joint-venture investments in Saudi Arabia, United Arab Emirates, Turkey, India and Pakistan.

The proposed acquisition of the GMR Energy stake will allow Tenaga to benefit from the solid growth potential of electricity consumption in India, where there is significant economic growth, and diversify away from Malaysia's mature power industry, Moody's pointed out.

But the proposed acquisition, which involves assets with 2.3 gigawatts of operating capacity and an additional 2.3 gigawatts of capacity under construction and development, also introduces Tenaga to new operating and regulatory environments in which it does not have experience, Moody's said.