Puncak Niaga Holdings Bhd - 2008 / 2009

MARC has affirmed the A+ long-term rating of Puncak Niaga Holdings Bhd’s (PNHB) RM546.875 million Redeemable Unconvertible Junior Notes with detachable warrants (RUN). Concurrently, MARC has revised the rating outlook to developing from stable to reflect the noteholders increased exposure to the proposed restructuring of the Selangor state’s water industry. PNHB had announced on February 20, 2009 that it had decided to reject the Selangor state government’s offer of RM1.14 billion for Puncak Niaga Sdn Bhd’s (PNSB) asset and RM543.0 million for its equity due to a number of reasons including the fact that it would be insufficient to address all liabilities of PNSB. PNHB also rejected the state’s offer for the assets and equity of related entity and sole offtaker of PNSB’s treated water, Syarikat Bekalan Air Selangor Sdn Bhd (Syabas). As highlighted in MARC’s recent rating announcement on Syabas, the latter company faces the risk of lower-than-expected tariff revision and could potentially face the risk of unilateral termination of its concession agreement (CA) arising from purported breaches of certain provisions in the CA as reported by the media. MARC understands from Syabas that it has not received any official notification on the alleged breaches and also that its actions have been in compliance with the provisions of the CA.

The RUN is secured back-to-back against PNSB’s RM546.875 million Junior Notes A (A Notes) and are rated equal with each other as the debt service obligations of the A Notes was structured to match the coupon and principal payments of the RUN. The rating of A Notes is two notches below PNSB’s direct, unsecured debt obligations rating on account of the considerable proportion of secured and senior debt obligations in PNSB’s debt profile as well as the contractual position of the RUN vis-à-vis other debt obligations of PNSB. The coupon and principal payable on the A Notes are direct, unconditional and unsecured obligations of PNSB and rank pari passu with all other unsecured and unsubordinated obligations of PNSB.

PNHB’s A+ rating on its RUN and PNSB’s A Notes rating is dependent on the strength of PNSB to generate earnings and cash flow from its water assets, a total of 30 water treatment plants (WTP) in the state of Selangor, and Federal Territories of Kuala Lumpur and Putrajaya. PNSB’s ratings are supported by its strong water demand fundamentals, cash flow certainty and better collections from sole offtaker. For the audited financial year ended December 31, 2007 (FY2007), PNSB recorded 20.8% increase in revenue of RM869.4 million while operating profit before interest and tax (OPBIT) margin remains strong at 31.2%. During the financial year, PNSB generated free cash flow of RM255.5 million despite incurring high operating costs and capital expenditure requirements. Its debt service cover ratio continued to remain strong at 5.52 times. Meanwhile, PNSB maintains ample debt service reserves of RM301.76 million as at November 30, 2008 to meet its near-term debt service obligations.

PNHB’s 70%-owned subsidiary Syabas, which was granted a 30-year concession to distribute treated water within the state of Selangor, and the Federal Territories of Kuala Lumpur and Putrajaya commencing from January 1, 2005 is currently rated AA-ID by MARC.

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