RUN Holding SPV Bhd - 2007

MARC has assigned ratings of MARC-1/A+ to the first issuance of up to RM200.0 million under RUN Holding SPV Bhd’s (RHSB) proposed RM500.0 million commercial papers (CPs) and medium term notes (MTN) programme (collectively referred to as “the Notes”). The ratings on the Notes reflect the credit quality of the underlying securities, Puncak Niaga Holdings Bhd’s (PNHB) Redeemable Unconvertible Notes (RUNs) due in 2016, and addresses the likelihood of RHSB making payments on the Notes in a timely manner, under the provisions pertaining to the Notes’ issuance. RHSB is a bankruptcy remote special purpose company whose shares are held on behalf of charitable trusts and was incorporated solely for the purpose of issuing the Notes. The nominal value of each CP/MTN issued shall be supported by a RUN of equivalent nominal value.

Upon issuance of the Notes, RUNs of equivalent nominal value will be acquired using the proceeds. All debt service payments received from the RUNs will serve as the basis for periodic repayments to noteholders. Payments from the RUNs will be remitted directly into RHSB’s revenue account, subject to a time lag of 5 days needed to facilitate the clearing of the RUN payments. Under the terms of the transaction, the security agent, UOB (Malaysia) Bhd (rated AA+ by MARC), will ensure that all cash proceeds from the RUNs and all issue proceeds from the Notes, will be deposited into the revenue account (RA) and the operating account (OA), respectively. Exposure to basis risk is not expected to be significant, as CPs will be issued at the close of the transaction to match payment flows under the RUNs which are due in less than one year. The other expenses of RHSB comprise transaction costs and taxes related to the Notes. It has been represented to MARC that RHSB’s tax liabilities will be minimal due to the structural features incorporated under the transaction. Consequently, payments collected in respect of the RUNs are expected to be sufficient to service debt obligations under the Notes as well as RHSB’s senior expenses during the tenure of the transaction.

The RUNs are backed by Puncak Niaga Sdn. Bhd.’s (PNSB) A Notes on a 1 to 1 basis. Redemption of the Notes in 2011 is expected to occur through one of two possible scenarios. Under the first scenario, the RUNs will be put to PNHB for redemption. Redemption can also occur in 2011 via an exercise of PNHB’s call option on the RUNs. Either of the two scenarios will result in early redemption of the RUNs, the proceeds of which, will be used to redeem the CPs and MTNs outstanding at the time.

PNHB is an investment holding company listed on the Main Board of Bursa Securities Berhad with two main subsidiaries comprising of PNSB and Syarikat Bekalan Air Selangor Sdn. Bhd. (SYABAS).  Following the acquisition of SYABAS, PNHB group is vertically integrated with its operations encompassing almost the entire water supply chain, i.e. from the treatment of water to the supply of water to end users in Selangor, Wilayah Persekutuan and Putrajaya.

Profitability of PNHB group has been relatively stable historically, a reflection of the demand for treated water.  Following the acquisition of SYABAS, revenue doubled to breach the one billion mark although profit margin has narrowed considerably to below 30%, reflecting the higher cost structure of the water distribution business.  Cashflow coverage of the group has improved significantly with PNSB’s receipt of RM699.5 million from the Selangor State Government via a special purpose vehicle as partial settlement towards PNSB’s old outstanding receivables in fourth quarter 2004. Although the group’s operating cashflow deteriorated in FY2006 due to negative operating cashflows at SYABAS, receipt of a government grant totalling RM246.9 million shored up the group’s liquidity position as at FY2006.

Debt leverage of the group edged up higher to 1.84 times in FY2005 (FY 2004: 1.3 times) with additional borrowings procured by SYABAS to fund its capital and operational expenditures.  As at end FY2006, debt leverage of PNHB group was reported at 1.41 times.