MARC has reaffirmed SAJ Holdings Sdn Bhd’s (SAJH) RM1.28 billion Bai Bithaman Ajil Serial Bonds (BaIDS) long term rating of AA-ID with a stable outlook. The rating is supported by its proven operating and financial performance track record; Johor state’s growing water demand; a tariff setting mechanism that provides for an agreed rate of return to the company and a fairly tight issue structure.

Under the Concession Agreement (CA), the tariff setting mechanism is premised upon SAJH achieving a pre-determined internal rate of return (IRR) and the Johor State Government’s (JSG) obligation to gazette tariffs or pay compensation to SAJH in circumstances where the gazetted tariff is lower than the applicable Agreed Tariff or implementation has been delayed, provided the IRR is below the agreed band of 14% and 18%. However, the 2006 Tariff Review (which was consented in 2003) was not acceptable by JSG as, it will exceed the upper tariff band as per the CA. In turn, JSG has consented to a lower tariff hike, which will only be implemented in 2007 (i.e. one year delay from the actual timing for tariff revision). However, the implementation date has yet to be determined.


Correspondingly, JSG has discharged SAJH from the payment obligations (Fixed Monthly Payment and Bulk Sales Rate Payment) required under the CA and, concurrently, SAJH has entered into a Water Supply Agreement (WSA) with a special purpose vehicle (SPV) namely Johor Special Water Sdn Bhd, a company wholly owned by JSG. The SPV will buy treated water from the water operators and resell to SAJH for a period of three months. SAJH, in turn, will pay the SPV for the sum of up to RM90 million based on the scheduled payments as stipulated in the WSA, starting from 2007 to 2013. Hitherto, the WSA has been signed by the relevant parties and executed on 30 December 2005. As part of the proposed restructuring exercise, SPV shall also, subject to certain terms and conditions, enter into a Lease Agreement with SAJH for the lease of water treatment assets upon the expiry of the water supply period. The total lease payments shall be up to RM1,015 million and payable according to a rent payment schedule over the period from 2014 until 2025. Via the proposed scheme, SAJH expects to save about RM880 million from the date of the WSA to year 2014 and therefore strengthen its cash flow protection measures.

SAJH will still be impacted if smaller tariff hikes are implemented in year 2009 for domestic and industrial categories respectively. This could result in a lower Finance Service Coverage ratio position. Nevertheless, compensation from JSG should be forthcoming for any revenue loss, provided the IRR is below the agreed band. Hence, the strength of SAJH’s cashflow lies in tariff adjustment review, compensation payment and/or other cost containment measures. However, if a lower tariff is implemented, SAJH has the flexibility to defer some of the capital expenditure to commensurate for the lower tariff, thus, reducing the strain on the cashflow resulting from the revenue loss.


The increase in revenue during FY2006 was attributable to the annual increase in water consumption. However, pre-tax profit was impacted by high finance costs due mainly to the drawdown of the RM1.28 billion BaIDS. Going forward, SAJH’s revenue growth is expected to be mainly driven by the increasing industrial demand which accounted for more than 50% of water revenue historically. Based on the debt to equity ratio defined in the Trust Deed, SAJH’s debt leverage was 1.5x, which was significantly below the covenanted proportion of 70:30. SAJH’s leverage is expected to improve with the amortization of the BaIDS starting in 2010 and the expected accumulation of reserves.



Supporting the rating affirmation is also the tight issue structure where priority ranking has been accorded to the BaIDS payment obligations under the payment waterfall. In addition, the maintenance of the Finance Payment Accounts (FPA) ensures that funds are gradually built up to meet debt service while the second level of protection is in the form of a six-monthly liquidity buffer maintained in the Finance Service Reserve Account (FSRA).