Viable Chip (M) Sdn Bhd - 2007

Major Rating Factors

Strengths

• Debt repayment ability supported by reliable dividend stream from SPLASH which exhibits a strong financial profile;
• Some 70% to 80% of SPLASH’s revenues is derived from capacity charges which promotes revenue stability;
• Shareholders’ capacity and willingness to meet shortfalls in debt service provide insulation against uncertain cash flows; and
• Considerable refinancing flexibility afforded by SPLASH’s remaining concession period.

Challenges/Risks

• Mismatches of distributions from SPLASH Holdings and issuer’s debt service;
• Vulnerability to changes in dividend policy at SPLASH and SPLASH Holdings; and
• Structural uncertainties in the domestic water industry posed by impending industry restructuring.

Rationale         MARC has affirmed the rating of AAAID(bg) / A+ID  on Viable Chip (M) Sdn Bhd’s (“VCSB”) RM50.0 million nominal value of Bank Guaranteed Bai’ Bithaman Ajil Islamic Debt Securities (“BaIDS A”) and RM150.0 million nominal value of Bai’ Bithaman Ajil Islamic Debt Securities (“BaIDS B”). The stable rating outlook for the BaIDS A mirrors that of the guarantor, Public Bank Bhd. The rating outlook for BaIDS B is also stable. However, the rating remains sensitive to the outcome of the water sector reform.

The rating of BaIDS A is based on an irrevocable and unconditional bank guarantee from Public Bank Bhd – AAA rated.  The rating of BaIDS B is underpinned by the dividend paying capacity of Syarikat Pengeluar Air Sungai Selangor Holdings Bhd (“SPLASH Holdings”). Dividends from SPLASH Holdings are expected to be the primary payment source for debt service on the BaIDS. SPLASH Holdings owns 100% of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (“SPLASH”), a water treatment plant operator in the state of Selangor. SPLASH Holdings’ dividend payment capacity is a function of SPLASH’s revenue flows from sales of bulk water to Syarikat Bekalan Air Selangor Sdn Bhd (“SYABAS”). SPLASH’s water revenues exhibit a high level of year-on-year stability and predictability which feeds through to its credit protection measures and provides reasonable funding certainty in respect of dividend upstreaming to SPLASH Holdings. The rating is further supported by an undertaking by Kumpulan Perangsang Selangor Bhd (“KPSB”) to provide necessary liquidity to counter shortfalls in designated account balances in relation to meeting VCSB’s obligations to BaIDSholders. The BaIDS are also secured by VCSB’s 30% shareholding in SPLASH Holdings.

VCSB is wholly owned by KPSB which in turn is 53.59% owned by Kumpulan Darul Ehsan Bhd (“KDEB”), a wholly owned subsidiary of Menteri Besar Selangor (Incorporated). VCSB was established in January 2006 to acquire KPSB’s 30% shareholding in SPLASH Holdings, comprising 51,000,000 ordinary shares and 690,000 redeemable preference shares (“RPS”). The other shareholders of SPLASH Holdings are Gamuda Berhad (40%) and The Sweetwater Alliance Sdn Bhd (30%).

Currently, the profit payments on the BaIDS are met from pre-funded Finance Service Reserve Account (“FSRA”). The first profit payment of RM5.50 million was made in February 2007, while the second profit payment of RM5.50 million was made in August 2007. The balance in the FSRA stood at RM5.79 million as at 1 September 2007 following a RM5.50 million transfer by KPSB.

SPLASH is a special purpose company formed to undertake 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”). SPLASH’s counterparty risk is low. Its sole bulk water customer is SYABAS which has a senior unsecured debt rating of AA-. SPLASH’s contractual relationship with SYABAS is underpinned by a 30-year privatisation agreement with the Selangor State Government and a subsequent novation agreement between SPLASH, the Selangor State Government and SYABAS. SPLASH’s revenue is bolstered by its sizeable fixed capacity charge (70% to 80%) component, which largely, insulates SPLASH from revenue risks associated with fluctuations in water demand. Notwithstanding, SPLASH’s strong credit profile, dividend payments to shareholders could be lower than projected, given the discretionary nature of dividends. This would expose VCSB to lower than expected cash flows, in which case VCSB would be reliant on KPSB to support its debt service requirements. KPSB’s recent transfer of RM5.50 million to restore the FSRA balance demonstrates its capacity and willingness to honour its undertaking to cover shortfalls in VCSB’s debt service obligations.