Windfall tax woes for IPPS

Windfall tax woes for IPPS

A new and hefty windfall tax has squeezed the cashflows of Malaysian independent power producers (IPPs) and unleashed fears of default on debt repayments on a skittish debt market.
 
Malaysia's government announced that a windfall profit levy of 30% would be charged, effective 1 July 2008 on return on assets for IPPs, with return on assets in excess of 9% for each financial year.

Malaysian credit rating agency RAM Ratings estimated that a third of the RM30bn (£4.82bn) IPP-related bonds rated by the agency - or nine out of 25 - are likely to be affected by the levy.

In RAM's list, all the AA-rated bonds remained unaffected, with two exceptions, while most of the affected issues were A-rated. 'The bad news is that for the few affected issues, losses are expected to be sharply felt across the market. Few bond issuers will be spared,' Wong Fook Wah, chief executive of RAM Ratings, told student accountant.

It was estimated that some of the affected issues could default on their debt repayment obligations within five years due to the punitive tax. Media reports estimated that the largest IPP, Malakoff Bhd, could pay about RM250m (£40.14m) in annual windfall tax, while Jimah Energy Ventures estimated it would have to pay between RM55m (£8.83m) and RM120m (£19.27m) annually in levy once its 1,400MW plant begins commercial operations.

But IPPs do have a potential way out: the government has promised that IPPs which successfully renegotiate the terms of their power purchase agreements (PPAs) with national electricity utility company Tenaga Nasional Berhad would be exempt from the tax effective from the date the new PPAs come into force. However, it remains to be seen if the renegotiated PPAs will leave IPPs in better shape, compared with the impact of the windfall tax.