PETALING JAYA: Affected independent power producers (IPP) will face reduced project returns and lowered debt servicing ability if the Windfall Profit Levy (Electricity) Order 2008 is implemented, says Malaysian Rating Corp Bhd (MARC).
The impact, however, would be uneven across different classes of IPP project debts, it said in a statement.
Holders of subordinated debt would be affected to a greater extent, given the reduced after-tax residual cash flows available for servicing junior debts, it added.
The introduction of windfall tax now challenged the historical assumption of low regulatory risk for IPP financing.
This was because the Government's willingness to support original arrangements on which project financing rested, from power purchase agreements to its tax regime, had always been an important factor underpinning the high investment grade ratings assigned to IPPs and their senior bonds, MARC said.
“Proposed changes to the tax regime should be considered in the light of its effects on existing project financiers, including bondholders and future investor behaviour,” MARC said.
The implementation of the windfall tax would detract from the original objective of power sector privatisation, which was to promote and reward efficiency.
“IPPs may start engaging tax optimisation strategies rather than strive for operational efficiency to avoid exceeding the 9% benchmark of return on asset, defined as PBIT (profit before interest and tax) over total asset, to avoid the costly 30% windfall levy,” it said.
MARC also foresaw that the IPPs might be motivated to circumvent the windfall levy by revaluing their power plant assets on a replacement cost method.
This is especially now that material, engineering and contract prices were much higher.
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