Syarikat Pengeluar Air Sungai Selangor Sdn Bhd - 2009

MARC has affirmed Syarikat Pengeluar Air Sungai Selangor Sdn Bhd’s (SPLASH) ratings of MARC-1ID /AAID on its RM435 million Islamic Notes Issuance Master Programme comprising RM50 million Murabahah Commercial Papers (MCPs) and RM385 million Murabahah Medium Term Notes (MMTNs). The developing outlook on the rating has been maintained pending finalisation of the acquisition of the water assets and operations of the concessionaire for Sungai Selangor Water Supply Scheme Phases 1 and 3, by the Selangor State Government (SSG). SPLASH’s conditional acceptance of the SSG's third offer to acquire its water assets and operations for an estimated gross price of RM2,975 million is, however, subject to approvals from relevant authorities and execution of the transaction via a sale of shares of SPLASH’s parent company, Syarikat Pengeluar Air Selangor Holdings Bhd to SSG or its nominee. The estimated purchase price of RM2,975 million consists of equity value to be paid by SSG to SPLASH of RM1,579 million and assumed liabilities of RM1,396 million. SSG will assume liabilities incurred by SPLASH in relation to its water related operations or water assets, including the rated facilities. MARC will maintain a developing outlook on the rating until such time greater clarity about the detailed terms and expected timing of the transaction emerges.

The affirmed ratings continue to reflect SPLASH’s sustainable operating performance, the robust demand for water in the state of Selangor and the Federal Territory of Kuala Lumpur and SPLASH’s tariff structure which ensures predictability of its revenue stream. These positives are moderated by relatively high debt leverage and continued delays in payment by SPLASH’s sole-offtaker, Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS). Since January 2009, SYABAS has not been making full payment of its monthly billings in consequence to the deferment of its scheduled increase in water tariff of approximately 37% in January 2009 which has yet to be compensated by the SSG. Mitigating the near-term increased collection risk is the fairly advanced stage of the Selangor water industry restructuring and MARC’s expectation that SPLASH will be able to maintain compliance with its minimum DSCR requirement under the rated facilities up to 2011. MARC views the foregoing to be transitory as a result of the ongoing industry restructuring.

Revenue has been stable, attributed to fixed capacity charge which constitutes 70%-80% of revenue. From January 2009, SPLASH’s capacity payment increased by 18.8% to RM48 million per month from RM40.42 million per month as per the Privatisation Agreement. The increase in capacity charges contributed to higher revenue of RM635.7 million for financial year ending March 2009 (FY2009) (FY2008: RM614.56 million) and improvement in operating profit margin to 48.6% (FY2008: 46.8%). Cash flow from operation (CFO) has, so far, been stable, and was sufficient to address capital spending and debt service requirements. Nonetheless, the continued delays in payment from SYABAS since the final quarter of FY2009 have resulted in a slightly lower CFO of 273.23 million (FY2008: RM276.9 million).

Major Rating Factors

Strengths

Challenges/Risks