SAJ Holdings Sdn Bhd - 2008 / 2009

MARC has placed its AA-ID rating on SAJ Holdings Sdn Bhd’s (SAJH) RM1.28 billion Bai Bithaman Ajil Islamic Debt Securities (BaIDS) on MARCWatch Positive following the announced signing of a Master Agreement on March 11, 2009 by the federal government, Johor state government, Syarikat Air Johor Sdn Bhd (SAJSB), Ranhill Utilities Berhad (RUB), Pengurusan Aset Air Berhad (PAAB) and SAJH.  SAJH, a subsidiary of RUB, holds a 30-year concession commencing in March 2000 awarded by the Johor state government to supply treated water to consumers in the state. MARC’s last rating action on SAJH had been to change its rating outlook to developing from stable while affirming its rating on the water distribution concessionaire on January 30, 2009, to reflect operational and regulatory uncertainties faced by the water concessionaire in light of the restructuring of the water sector.

MARC considers the recent development to be positive as it removes a substantial amount of uncertainty regarding the restructuring of the water sector and corresponding credit implications for SAJH’s rated debt. Under the terms of the Master Agreement, SAJH has agreed to transfer all of its water assets, including capital works, at one time book value and all corresponding liabilities including the RM1.28 billion BaIDS to PAAB. The Master Agreement is conditional upon fulfilment of conditions precedent which includes, among others, the approval of all BaIDS holders for the absolute transfer of all SAJH’s rights and obligations under the BaIDS to PAAB. The conditions precedent to the Master Agreement is to be fulfilled within 180 days from the date of the agreement (i.e. within the third quarter of 2009), failing which the agreement will lapse with the parties involved having no claims against each other. Concurrently, SAJH has entered into a facility agreement with PAAB for the right of use of assets over a 30-year period in consideration for the payment of lease rental on existing assets taken over by PAAB as well as new assets developed and funded by PAAB. SAJH will then migrate to the new licensing regime governed by the Water Services Industry Act (2006) as a licensed water operator, subject to compliance with the National Water Services Commission guidelines and regulations.

The MARCWatch Positive placement indicates that the current rating could be raised upon final consummation of the announced agreements and successful novation of the BaIDS to PAAB, a wholly-owned company of the Minister of Finance Incorporated. In the event the agreements are not successfully concluded, MARC will review the credit impact of subsequent developments on SAJH's business and financial risk profile and take appropriate rating action as and when necessary.

SAJH is the incumbent water distribution company in the state of Johor under a 30-year concession until February 2030. SAJH’s stable operational and financial performance benefits from a favourable tariff structure which sets an allowed internal rate of return (IRR) within the stipulated band of between 14% and 18%, low operating risk and adequate operating efficiency. The company currently has sufficient cash liquidity within various designated accounts securing the BaIDS to cover the first of 10 annual principal repayments on the BaIDS due in October 2010.

Major Rating Factors

Strengths

• Sole distributor of treated water in the state of Johor;
• Robust demand of water and low volume volatility;
• Low operating risk and improved operating efficiency; and
• Strong debt service coverage underpinned by stable cash flows from water sales.

Challenges/Risks

• Heavy capital expenditure to enhance operational efficiency; and
• Ongoing nationwide restructuring of the water industry.