Malaysia's Tenaga makes debt-fuelled Indian acquisition

The state-owned utility will pay $300m for a stake in assets owned by GMR Energy, a deal Moody's deems "credit negative".

Malaysian utility Tenaga Nasional has agreed to acquire a 30 percent stake in a portfolio of energy assets owned by GMR Energy, a subsidiary of Indian giant GMR Infrastructure, for $300 million. 

The proposed transaction has failed to enthrall outside observers so far, with Moody's deeming it “credit negative” for Tenaga. Although the state-owned company said in a statement that the investment will be financed by “a combination of internal funds and/or external debt”, the rating agency assumes the transaction will be entirely debt-funded. 

“It will reduce the company’s liquidity and, depending on the funding mix, increase its adjusted debt,” said Abhishek Tyagi, a vice president at Moody’s project and infrastructure finance team, in a report detailing the agency's view.

GMR Energy has a portfolio of five operational power assets comprising coal, gas and renewable energy facilities with a combined generation capacity of 4,630MW. About half of the capacity is operation, with another 2,300MW in various stages of development in India and Nepal.  

The acquisition is the second by Tenaga in the past two months. It follows the company's $243 million purchase of a 30 percent stake in GAMA Enerji in Turkey from parent company GAMA Holding, the International Finance Corporation and the IFC Global Infrastructure Fund. The deal was closed last month. 

Moody’s expects Tenaga’s ratio of retained cash flow to debt to be around 23 percent for the year ending 31 August 2016 pro forma for the two transactions, versus 25 percent without them. 

The ratio level is still within the agency’s quantitative guidance of 17-25 percent for Tenaga’s rating, but the additional debt used to fund the acquisitions will reduce headroom, it noted. 

Tenaga, backed by sovereign wealth fund Khazanah Nasional, aims to expand its business and reduce its overall exposure to Malaysia, which currently provides nearly all of its revenues. Once the GMR Energy deal completes, the Malaysian utility will be involved in partnerships and joint-venture investments in Saudi Arabia, the United Arab Emirates, Turkey, India and Pakistan. 

The deal will allow Tenaga to benefit from the strong growth of India's power market, which is adding 20GW of power per year, helping it diversify away from Malaysia’s mature power industry. 

Moody’s cautioned, however, that the GMR Energy investment exposes Tenaga to operating and regulatory environments of which it does not have experience. 

The Indian energy company, which is backed by Singapore’s Temasek and a consortium led by India’s IDFC Alternatives, will use the proceeds from the transaction to repay corporate debt. 

GMR Infrastructure, as well as some other Indian infrastructure companies, has been selling assets in the road, energy and airport sectors as part of its efforts to trim debt. The company’s debt totalled INR434.4 billion ($6.5 billion; €5.74 billion) as of 30 September 2015.