MARC has assigned an A+ID rating to Sweetwater SPV Sdn Bhd’s (SSPV) proposed RM195 million Bai Bithaman Ajil Islamic Debt Securities (BaIDS). The rating is driven by the operational and financial capability of Syarikat Pengeluar Air Selangor Sdn Bhd (Splash) to upstream dividends to its shareholders, payment of interest on the loan stocks or loan stock redemption because these cashflows will form the sole repayment source of SSPV’s BaIDS. Enhancements provided in the structure include the maintenance of a Reserve Account (which shall be pre-funded from the BaIDS proceeds) to serve as a liquidity buffer to repay BaIDS obligations in case there are timing differences in obtaining cash from Splash. Another level of protection comes from SSPV’s and/or its parent’s undertaking to provide liquidity line for an amount equal to the next one year financing obligation should the cash in the Designated Accounts is insufficient. Also note that all the Designated Accounts are solely controlled by the Security Trustee to minimize cashflow leakages.

SSPV is a special purpose vehicle incorporated as a wholly-owned subsidiary of The Sweet Water Alliance Sdn Bhd (TSWA) to undertake the fund-raising exercise. As part of the security, TSWA’s 30% shareholding in Splash is pledged with the BaIDsholders. SSPV’s characteristics shall conform to bankruptcy remoteness; which includes prohibition from engaging in any other business or activity; prohibition from incurring debt other than that necessary for its role in the transaction; restriction on mergers; and consolidation and asset sale.

TSWA has 40% stake in Syarikat Pengeluar Air Selangor Holdings Berhad (Splash Holdings), the holding company for the concessionaire, Splash which is undertaking the privatization of the operation & maintenance (O&M) of the Phase 1 water treatment facilities at Bukit Badong (SSP1), as well as the construction and O&M of Phase 3 of the Sungai Selangor Water Supply Scheme (SSP3) for 30 years. SSP3 has now been fully completed. In return for the supply of the treated water, SPLASH is getting capacity and supply payments from Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS), the privatized company to take over the roles of water distribution and tariff collection from Perbadanan Urus Air Selangor Berhad (PUAS) effective from 1 January 2005.

Since the repayment source of the BaIDS will come solely from the contribution by Splash, a detailed analysis is conducted on Splash to ascertain the ability of Splash upstreaming the cashflows.

Historically, operating margin of Splash has been stable due to the take-or-pay provision in the privatization agreement and the cost pass through mechanism factored in the capacity charges. As capacity charges are payable to Splash regardless of the quantity of water SYABAS requests, Splash is insulated against water demand fluctuations. The charges are structured to cover Splash’s debt servicing, overheads and a portion of O&M costs as well as to provide reasonable returns to its shareholders. Supply charges, on the other hand, are variable charges payable by SYABAS based on the volume of water supplied by Splash.

The risk of the actual cashflows to TSWA being lower than what is projected will affect the repayment ability of SSPV. Reasons that could lead to the variation include lower actual earnings by Splash or stricter dividend distribution covenant on Splash’s existing bonds. The first issue is related to the performance risk of Splash which, in MARC’s opinion, is manageable, particularly, in the absence of construction risk, track record of Splash’s satisfactory operations and proven shareholders’ commitment in improving the company’s credit profile during liquidity crunch period depict the management’s credibility operationally as well as financially to maintain Splash’s earnings. The second risk is mitigated by TSWA’s undertaking to provide liquidity line should the actual cash inflows are insufficient to fulfil the BaIDS obligation.

The timeliness of payments from SYABAS is also crucial to Splash’s cashflows to fund its working capital requirement. Credit risk of SYABAS (70% owned by Puncak Niaga Holdings Berhad and 30% owned by Kumpulan Darul Ehsan Berhad) is deemed to be satisfactory given the strong shareholders and its prompt payment track record thus far.