Viable Chip (M) Sdn Bhd - 2008

MARC has affirmed its AAAID(bg) and A+ID  ratings on Viable Chip (M) Sdn Bhd’s (VCSB) RM50.0 million nominal value 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), respectively. The AAAID(bg) rating of BaIDS A has been affirmed on the basis of an irrevocable and unconditional bank guarantee from Public Bank Bhd in respect of which MARC  maintains a public information financial institution rating of AAA/Stable. The stable rating outlook reflects MARC’s view that the AAA rating of Public Bank Bhd is solidly placed within its rating category.

The A+ID rating on BaIDS B has been affirmed on the basis of the strong dividend paying capacity of Syarikat Pengeluar Air Selangor Holdings Berhad (SPLASH Holdings) which, in turn, is derived from the sustained financial performance of its operating entity, Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH). VCSB’s BaIDS B rating is notched down from the senior unsecured rating of SPLASH to reflect structural subordination of VCSB’s debt obligations relative to the direct obligations of SPLASH. The rating outlook of the BaIDS B has been revised to developing from stable. The outlook revision of BaIDS B mirrors that of the water treatment plant operator, SPLASH, whose rating outlook has been revised from stable to developing to reflect regulatory uncertainties arising from ongoing reforms in the water industry. MARC is of the view that event risk linked to the concession renegotiations between Suruhanjaya Perkhidmatan Air Negara (SPAN) and SPLASH, and the proposed take-over and consolidation of the water-related assets in Selangor by the Selangor State Government (SSG) through its investment arm, Kumpulan Darul Ehsan Bhd (KDEB) may increase in the future, and potentially place downward pressure on the A+ID rating of the BaIDS B.

Established in January 2006 as a wholly-owned subsidiary of Kumpulan Perangsang Selangor Berhad (KPSB), which is, in turn, 56%-owned by KDEB, VCSB acquired KPSB’s 30% shareholding in SPLASH Holdings. SPLASH Holdings is the sole shareholder of SPLASH, the concessionaire for Sungai Selangor Water Supply Scheme Phase 1 (SSP1) as well as the Sungai Selangor Water Supply Scheme Phase 3 (SSP3). Both SSP1 and SSP3 have a combined capacity to treat and supply 2,000 million litres of water per day, which makes SPLASH the largest water treatment operator in Selangor. SSP3 is built and operated under a 30-year Build-Operate-Transfer (BOT) concession expiring in 2029 while SSP1 is managed and operated under a 30-year concession expiring also in 2029.

For the past four years, SPLASH has registered an 11% compounded annual growth rate in revenue which is comprised of capacity and variable supply charges. Revenue stability is derived from the fixed-and-predictable nature of capacity charges, which represents the majority (70-80%) of total revenue. The credit quality of SPLASH’s sole offtaker, Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS) (rated AA-/MARC-1), supports SPLASH’s revenue collectibility.

VCSB receives residual cash flow sourced from SPLASH Holdings and SPLASH, which MARC regards as less certain than direct access to operating cash flows. SPLASH Holdings has demonstrated its capability and willingness in upstreaming dividends to VCSB. In 2008, VCSB has received RM114 million in net dividends from SPLASH Holdings to date. VCSB is not prohibited from distributing dividends to KPSB under the terms of the BaIDS issuance, however, MARC is of the view that the preservation of VCSB’s liquidity position and debt servicing capability relies heavily on retention of its dividend from SPLASH Holdings.
 
KPSB has provided an undertaking to cover shortfalls if balances in designated accounts are insufficient to meet VCSB’s obligations under the BaIDS. KPSB’s credit strength is primarily derived from its 56%-ownership by the Selangor state investment arm, KDEB.

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