MARC has affirmed the long term rating of AA+(S) to Titisan Modal (M) Sdn Bhd’s (“TMSB”) issuance of up to RM738.0 million Fixed Rate Serial Bonds (“FRSB”). The ratings affirmation is based on the credit quality of the Selangor State Government which has provided a letter of support for the obligations of TMSB in relation to the serial bonds, which, although not a guarantee, creates a strong moral obligation on the part of the State to support the issuer and its obligations in relation to the FRSB. The rating of the serial bonds is predicated on the creditworthiness of the state government and any changes in such will be reflected in the issue rating. The State’s implied rating of AA+ continues to reflect the state’s strong and growing economy, continuing trend of smaller current account deficits, more moderate debt levels as well as an improved state budgetary and liqudity outlook. The rating outlook is stable.

TMSB is 55% owned by Kumpulan Perangsang Selangor Berhad which is, in turn, 53% owned by Kumpulan Darul Ehsan Bhd, the investment arm of the Selangor Government. As a stand-alone entity, TMSB continues to maintain an unsupported rating of A+ on the FRSB based on the strong demand fundamentals for treated water in the State of Selangor, low operational risks, and the stable and relatively predictable cash flows generated at its main operating subsidiary, Konsortium Abass Sdn Bhd (“KASB”). The rating also reflects the financial leverage taken on by KASB, which results in structural subordination of TMSB’s debt obligations to the outstanding borrowings of KASB, and a one-notch difference in ratings between TMSB and KASB.

KASB was awarded a 30-year concession to privatize the Sungai Semenyih Water Supply Scheme by the Selangor State Government in 2001. The company also undertook the design, finance, construction and commissioning of the Bukit Badong Distribution Works (“BBDW”) of Sungai Selangor. Dividends upstreamed from KASB constitute the repayment source for TMSB’s serial bonds.

KASB has produced on average 612 million litres per day (MLD) of treated water during the past five years relative to its minimum designated capacity of 545 MLD per year required under the Privatisation Cum Concession Agreement (PCCA). KASB’s sole offtaker is Syarikat Bekalan Air Selangor Sdn Bhd (“SYABAS”) which has a AA- long-term corporate debt rating from MARC. The credit quality of the offtaker is essential to KASB’s revenue collectability.

Revenue and profit declined as expected in FY2006 with the completion of the BBDW project. Operating margins are solid, reflecting the company’s ability to pass through increases in chemical costs and electricity under the PCCA. Cash flow during the tenure of the bonds is expected to be robust with projected (base case) average and minimum debt service coverage ratios (“DSCR”) of 3.44x and 2.07x respectively. TMSB can withstand a reduction in production volume of up to approximately 6% throughout the tenure of the facility before breaching the DSCR covenant of 1.25x.