MARC has affirmed the rating of A+ID with Stable Outlook to Sweetwater SPV Sdn Bhd’s (“SSPV”) RM195 million Bai Bithaman Ajil Islamic Debt Securities (“BaIDS”). The rating is driven by the operational and financial capability of Syarikat Pengeluar Air Selangor Holdings Berhad (“Splash Holdings”) to upstream dividends to its shareholders, payment of interest on the loan stocks or loan stock redemption as these cashflows form the sole repayment source of SSPV’s BaIDS. Enhancements provided in the structure include the maintenance of a Reserve Account (which was 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 Holdings. Another level of protection comes from SSPV’s undertaking to procure a banking facility to provide a liquidity line for an amount equal to the next one year’s financing obligation should the cash in the Designated Accounts is insufficient.

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 Holdings is pledged with the BaIDsholders. SSPV’s characteristics also 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 30% stake in Splash Holdings, the holding company for the concessionaire, Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (“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 was conducted on Splash to ascertain the ability of Splash upstreaming the cashflows. Splash carries a credit rating of AAID while SYABAS carries a rating of AA-ID from MARC.

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 cashflow 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, is manageable, particularly, in the absence of construction risk, track record of Splash’s operations and proven shareholders’ commitment in improving the company’s credit profile during liquidity crunch periods. The second risk is mitigated by TSWA’s undertaking to procure a liquidity line should the actual cash inflows are insufficient to fulfill 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 relatively strong shareholders and their prompt payment track record thus far.

SSPV, meanwhile, has recorded an unaudited Net Profit Before Tax of RM804,557 for the six-month period from 1 January to 30 June 2006, compared with an audited Net Loss Before Tax of RM4.641 million during the period beginning 16 August 2005 to 31 December 2005. Revenue totaled RM8.01 million during the six-month period ended 30 June 2006 compared with nil previously.

Splash Holdings is also showing strength in its upstreaming of dividends to SSPV, with dividends of RM7.5 million received by SSPV for the six month period 1 January to 30 June 2006. This amount is sufficient to service the profit payment on SSPV’s BaIDS for the same period.