Sweetwater SPV 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;
• Debt service reserve, originally pre-funded to RM35 million, provides insulation against uncertain cash flows; and
• Considerable refinancing flexibility accorded by SPLASH’s remaining concession period.

Challenges/Risks

• Mismatches of distributions from SPLASH Holdings and 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 reaffirmed the rating of A+ID on Sweetwater SPV Sdn Bhd’s (“SSPV”) RM195 million Bai Bithaman Ajil Islamic Debt Securities (“BaIDS”). The rating outlook for the BaIDS is stable. However, the rating remains sensitive to the outcome of the water sector reform.

The rating is underpinned by the dividend paying capacity of Syarikat Pengeluar Air Sungai Selangor Holdings Bhd (“SPLASH Holdings”), a company in which SSPV owns a 30% stake. 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. To counter liquidity mismatches between the flow of dividends and that of debt service obligations under the BaIDS, The Sweetwater Alliance Sdn Bhd (“TWSA”), SSPV’s holding company, has provided an undertaking to procure a banking facility for an amount equal to the next one year’s financing obligation should the cash in the Designated Accounts be insufficient. MARC has attached little weight to the undertaking by TWSA as a rating driver. TWSA is an investment holding company whose activity is limited to holding a 100% stake in SSPV. The BaIDS are secured by SSPV’s 30% shareholding in SPLASH Holdings. The other shareholders of SPLASH Holdings are Gamuda Berhad (40%) and Viable Chip Sdn Bhd (30%).

Wholly owned by TWSA, SSPV is a special purpose funding vehicle, which possesses characteristics that 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 financing transaction; restriction on mergers; and consolidation and asset sale. SSPV purchased a 30% stake in SPLASH Holdings from TWSA with proceeds raised from the issuance of the BaIDS.

In FY2006, SSPV recorded RM14.95 million in revenue and a profit before tax of RM0.5 million. Reflecting its nature as a funding vehicle, the profit payment on the BaIDs of RM14.24 million constituted a major part of its expenses. Dividend income represented 91.36% of total revenue, at RM13.69 million and was sufficient to service the profits on the BaIDS in the same period.

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 SSPV to lower than expected cash flows, in which case SSPV would be reliant on TWSA to procure liquidity support facilities to cover shortfalls in its debt service obligations.