MARC has reaffirmed the rating of Puncak Niaga Holdings Berhad’s (PNHB) Redeemable Unconvertible Junior Notes (RUN) at A, similar to Puncak Niaga (M) Sdn Bhd’s (PNSB) junior notes A (A notes). The rating reflects a perfected security interest in the A notes and the escrow account to which matching debt service payments under the A notes will flow. The three-notch differential between the senior and junior debt ratings currently assigned to PNSB in turn, reflects MARC’s criteria for notching down junior debt, and the relatively high proportion of senior and secured debts that rank ahead of the notes in liquidation. The negative outlook placed on the rating has been lifted following the announcement on the financial assistance from the Federal Government towards the settlement of the long outstanding receivables problem faced by PNSB. This forms part of the privatization of water supply services in the State of Selangor and the Federal Territory.

PNHB is the holding company of PNSB, which in turn is the operator of 28 water treatment plants (WTPs) in Selangor and Kuala Lumpur. As the holder of two long-term bulk water concessions awarded by the State Government, PNSB generates well over 90% of the group’s consolidated revenue. As part of the water
privatization programme in Selangor and Federal Territory, the Federal Government has agreed to provide RM1.335 billion of financial assistance to settle the outstanding receivables owing by Perbadanan Urus Air Selangor Bhd to the three water treatment operators, namely PNSB, Syarikat Pengeluar Air Sungai Selangor Sdn Bhd and Konsortium ABASS.

MARC believes the overall issue structure of the junior notes programme provides adequate protection to the note holders. A security account was established to capture payments made by PNSB under the A notes, which in turn will be utilized to meet coupon and principal payments under the RUN. By charging the security account to the RUN holders, the exposure of the noteholders to insolvency risk of PNHB is reduced. PNHB holds an option to put the A notes to PNSB in year 10 to receive the total principal outstanding under the notes on the put date in the event the RUN holders exercise their put option to PNHB. The RUN also has a call option at year 10 which provides PNHB with the right to call back all the outstanding RUN. Sensitivity analyses suggest that PNSB would have sufficient cash balance to redeem the outstanding A notes on the exercise date.