MARC has assigned a rating of A (A flat) to Aliran Ihsan Resources Berhad’s (AIRB) redeemable convertible unsecured loan stocks (RCULS). AIRB, the NEWCO, was set up as the corporate vehicle to undertake the various corporate and debt restructuring schemes and to assume the listing status of RNC, an affected listed issuer under the Securities Commission’s Practice Note 4. Proceeds from the issuance of the RCULS will be utilized for debt settlement and for the proposed acquisition of water businesses by AIRB from the Vendors.

As part of the corporate and debt restructuring scheme, plastic businesses belonging to the RNC group will be disposed to settle amounts due to its creditors. Under a proposed acquisition scheme, AIRB will purchase water businesses from the Vendors. Upon completion of the proposed scheme, AIRB will own 100% of Southern Water Corporation (SWC), 49% of Equiventures Sdn Bhd (ESB) and 30% of Strategi Tegas Sdn Bhd (STSB), effectively giving AIRB the ownership of two concessions that are responsible for selling treated water to the State Government of Johor.

Pursuant to the 20-year concession agreement signed on 31 May 1994, SWC is currently the concessionaire responsible to take over, operate and maintain 14 WTPs covering the districts of Muar, Batu Pahat, Segamat and Kluang in Johor. Similarly, under the privatization cum concession agreement (PCCA) awarded by the State Government, ESB had to take over, operate and maintain the existing Sg Layang WTP and also finance, design, construct, commission, operate and maintain (amongst others)
another 450 MLD capacity WTP. Both concessionaires will receive fixed monthly payments (FMP) and bulk supply rates (BSR) for the sale of treated water from SAJ, the party which was awarded the privatization of water supply services in Johor.

Based on AIRB’s consolidated cash flow projections, which was conservatively based on SWC’s cash flow projections, MARC’s sensitivity analysis reveals a fairly resilient cash flow which is somewhat insensitive to delays in payment from SAJ. Historically, SWC’s revenue levels have trended in a stable manner with revenue from sale of treated water increasing steadily. Operating result in 2004 rebounded positively after the dismal results in 2003 which were affected by a write-off for debts in contention and depreciation charges which form a substantial part of the cost structure due to the capital intensive nature of the water utility industry. Moving forward, contributions from ESB (at associate level) are expected to further strengthen AIRB’s cash flow position. MARC expects SWC’s and ESB’s revenue to chart further growth going forward, in view of the increasing water demand across all consumer categories and growing population in the state of Johor.

SWC has maintained a conservative leverage position evident by its low debt to equity level through scheduled repayments of bank borrowings and against growing shareholders’ funds through accumulation of retained profits. AIRB’s pro-forma debt-equity is expected to be low given the enlarged capital base and low debt burden.