Selangor water operators downgraded by MARC, RAM

Selangor water players yesterday saw their debt issuances downgraded by both Malaysian Rating Corp Bhd (MARC) and RAM Ratings on the back of operating environment uncertainties.

Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), Puncak Niaga (M) Sdn Bhd (PNSB), Puncak Niaga Holdings Bhd (PNHB), RUN Holding SPV Bhd (RUNH), Syarikat Pengeluar Air Selangor Sdn Bhd (Splash), Viable Chip (M) Sdn Bhd (VCSB) and Titisan Modal (M) Sdn Bhd (TMSB) were downgraded by MARC, while RAM downgraded Splash and Taliworks Corp Bhd’s subsidiaries Destinasi Teguh Sdn Bhd and Sungai Harmoni Sdn Bhd.

Both rating agencies had cautioned that in the absence of meaningful progress in the industry’s restructuring and negotiations, further multiple-notch downgrades were likely by end-2010.

In a statement, MARC said urgent intervention on the part of the federal and the Selangor state governments was required to prevent a freefall of the current ratings in the following months.

“The recent regulatory and operating environment uncertainties have challenged the perception of strong implicit government support and highly predictable cashflow the water sector has historically enjoyed,” it said.

“This may have negative long-term implications for similar private-initiated infrastructure financings in the future, particularly from the angle of investor receptivity,” it added.

MARC downgraded Syabas by one notch to A+ID based on the company’s cash flow challenges and failure to meet monthly payment obligations to state bulk water producers.

It also downgraded PNSB’s senior debt rating on its Bai Bithaman Ajil Islamic debt securities (BaIDS) by two notches to A+ID to reflect its concerns with respect to its exposure to Syabas’ creditworthiness.

“PNHB’s RUN which are secured by PNSB’s RM546.875 million A Notes have been downgraded to A- to reflect the rating of the underlying A Notes.

“Accordingly, the short-term and long-term ratings on RUNH’s CP and MTN have been lowered to MARC-2 and A- respectively to reflect the identical rating considerations for PNHB’s RUN,” it said.

MARC had also downgraded Splash by three notches on its Murabahah medium term note (MMTN) to AID and downgraded its short-term debt rating by one notch to MARC-2ID on similar concerns.

The two-notch downgrade of VCSB’s BaIDS was based on the negative developments at Splash, although MARC said it was tempered by its parent Kumpulan Perangsang Selangor Bhd (KPSB) to provide liquidity support for the BaIDS.

It affirmed its AAAID(bg) rating on VCSB’s BG BaIDS on the strength of the irrevocable and unconditional bank guarantee from Public Bank Bhd, which is rated AAA/Stable by MARC on a public information basis.

The rating agency named TMSB as its most vulnerable rating on an unsupported basis, saying its standalone rating had been downgraded to BBB from A+ to reflect the weak liquidity position of Konsortium Abass Sdn Bhd and the heightened credit risk for TMSB’s bondholders given the nature of their claims on the cashflows of the water treatment operator.

It maintained a MARCWatch Negative status on TMSB’s FRSB AA+(s) rating on the debt note.

Meanwhile, RAM, which downgraded its ratings on Syabas, Destinasi Teguh and Sungai Harmoni from AA2 to BBB3, said the debt ratings remained on Rating Watch with a negative outlook.

“The BBB3 rating is anchored on expectations of indirect federal government, state government and/or possible financial support from the company’s shareholders, as had happened in the past, to help allay Splash’s liquidity crunch,” it said, of Splash’s outstanding receivables of RM610 million from Syabas.

“Weighed against its declining cash balances of around RM136 million as at end-July 2010, Splash is unlikely to be able to fill up its finance service reserve account (FSRA) minimum-required balances of RM225 million by January 2011 and could potentially default on its debt dues by July 2011, in the absence of any financial support.”

The Edge Financial Daily had reported on Sept 6 that bondholders of Selangor water companies had met in a closed-door session with Pengurusan Aset Air Bhd (PAAB) to discuss issues relating to the consolidation of the state’s water industry.

The bondholders were feeling jittery as some of the bonds issued by the water concessionaires in Selangor were undergoing technical defaults, as witnessed by yesterday’s downgrading by both MARC and RAM.

The main issue faced by them is the fact that Syabas’ 37% tariff hike was not implemented as agreed upon. This has affected the cash flow of the water companies in the state.


This article appeared in The Edge Financial Daily, September 9, 2010.