Tuesday July 8, 2008
IPPs’ RM20b bonds may be downgraded with windfall tax
PETALING JAYA: The independent power producers (IPPs) face a possible downgrade of their bonds with the Windfall Profit Levy (Electricity) Order 2008, which came into effect on July 1.
According to a statement issued by Penjanabebas president Dr Philip Tan yesterday, the value of ringgit bonds and notes issued by IPPs was estimated to be about RM20bil in 2006, making them the largest issuers of Islamic bonds in the country. Penjanabebas is the association for IPPs in Malaysia.
The Government on June 4 announced the tax as part of measures to cut down on fuel subsidies due to high oil prices. It recently said the 30% windfall tax would be imposed on the profits of IPPs when the return on assets exceeded 9% for each financial year.
Tan said the imposition of the tax would have an impact beyond the financial position of the IPPs and would adversely affect the overall economy and investor confidence in the country.
“It is the consensus view of our members that this move to impose the levy under the existing formula will have an immediate adverse effect on their financial viability and their ability to meet loan obligations to financiers and bond holders. The impact will also promote inefficiencies in the power generation industry,” he said.
Tan added that the market's acceptance and confidence in these bonds were premised on a clear understanding of the IPP's operating environment, business models and contractual obligations.
A foreign equity research house said the tax was the “worst possible outcome for the IPPs and bondholders” because it could lead to significant cashflow issues since part of the power plants' cashflow had been used by their holding companies to secure other debts, which was “a common occurrence almost across the board.” It said creditors were more likely to restructure the debts if efforts to get the Government to modify the terms of the tax failed.
According to Aseambankers Malaysia Bhd analyst Ong Chee Ting in a research note, sentiment on the IPPs would remain weak despite the recent corrections over their share prices.
He said the market was now concerned over the risk of bond de-ratings resulting from potential technical defaults and risk of ensuing rising borrowing costs further eating into cashflows and dividend yields, which had been the cornerstone of interest among investors.
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