Power firms fear new tax may dim bond outlook
INDEPENDENT power producers (IPPs) fear that the windfall tax imposed on them by the government will have a negative impact on the local bond market as well as the investment community at large.

An industry source said the move may result in a meltdown of debt and equity markets, leading to a spiralling adverse effect on the overall financial market in the immediate future.

"The windfall tax will cause IPP bonds, which make up a bulk of the bond market in the country, to be downgraded," the source told Business Times yesterday.

Furthermore, such a levy will send a negative message to the investment community as the windfall tax seems to penalise companies which are more efficient and to ignore the basic commercial realities that they face, the source said.

"We found out that some of the IPPs have even been contacted by banks to warn them about the consequences of the levy on their bond debts, fearing they (IPPs) will not be able to meet their obligations," he added, pointing out that IPPs are already paying a corporate tax of 26 per cent.

Last month, the government decided to implement the provision under the Windfall Profit Levy Act 1998 and impose a 30 per cent levy on returns on assets above the nine per cent threshold of the IPPs' audited accounts.

The source said the levy, imposed on IPPs with an installed capacity of 30 megawatts, will be calculated based on profit before interest and tax for the financial year, without taking into account any windfall profit levy paid.

It will also be based on the net value of fixed assets of IPPs as at the end of the financial year.

If the period in which the levy payable is less than a financial year, the levy payable will be determined on a pro rata basis.

RAM Rating Services Bhd said the effects of the windfall tax will vary depending on the specific project company's profitability and seniority of the rated debt issues.

It is of the view that highly-rated senior bonds should be adequately shielded.

"Having said that, prolonged imposition of the windfall tax could eat into the debt-protection reserves required for the ratings to be maintained," RAM's head of infrastructure and utilities ratings, Khoo Boo Hock, said in a statement last month.

He added that RAM has a greater interest in seeing the impact of the added tax burden on junior bonds and those issued by the IPPs' shareholders, which are dependent on equity distributions from their respective project companies.

"The windfall tax would result in lower cash reserves following the servicing of senior debt obligations and meeting the requirements of reserve accounts."

Under the circumstances, the ratings of these subordinated debt issues would be among the first to be negatively affected, Khoo pointed out.