Puncak Niaga Holdings Bhd - 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). The developing outlook on the rating has been maintained in the context of an apparent stalemate in the restructuring of the Selangor water sector. The Selangor state government has recently withdrawn its offer to acquire the water assets of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) and Konsortium Abass Sdn Bhd (Konsortium Abass), citing Syarikat Bekalan Air Selangor Sdn Bhd’s (SYABAS) and Puncak Niaga (M) Sdn Bhd’s (PNSB) rejection of the state government’s offer as the reason for its inability to proceed with the consolidation of water assets in the state. Further complicating the situation is the continuing impasse between the federal government and the state with respect  to the state’s water consolidation exercise which, MARC believes, will likely result in protracted regulatory and operating environment uncertainties for water concessionaires in the state (please refer to Exhibit 3 for further details on water regulatory reforms).

The RUNs are secured by PNSB’s RM546.875 million Junior Notes A (A Notes), and are accordingly rated identically. The debt service obligations of the RUNs were structured to match the coupon and principal payments of the A Notes. The rating of the 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 A Notes 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.

The A+ ratings on PNHB’s RUNs and PNSB’s A Notes are dependent on the strength of PNSB’s ability to generate earnings and cash flow from its water assets, a total of 29 water treatment plants (WTP) in the state of Selangor, and Federal Territories of Kuala Lumpur and Putrajaya. PNSB’s rating is supported by the strong water demand fundamentals and cash flow certainty afforded by the take-or-pay provision and structure of the bulk supply rate (BSR) under its concession agreements. For financial year ended December 31, 2008 (FY2008), PNSB’s revenue declined by 24.4% to RM657 million, and in turn, profit before tax was lower at RM90.5 million (FY2007: 96.3 million). Notwithstanding this, revenue from treated water increased by 6.1% to RM590.4 million (FY2007: RM556.6 million). During FY2008, PNSB generated free cash flow of RM182.4 million, and maintains a good cash balance buffer of RM347.14 million as at end-June 2009, excluding the debt service reserve account. Its facility debt service cover ratio (DSCR) remains strong at 7.13 times.

PNHB’s 70%-owned subsidiary, SYABAS, 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. MARC recently affirmed SYABAS’ debt rating at AA-ID.

The ten equal annual redemptions of RM54.6875 million on the A Notes/RUNs began on the sixth anniversary on November 20, 2007. With the successful third redemption on November 20, 2009, the principal outstanding on the A Notes/RUNs currently stands at RM382.8125 million. There is a possible risk of an early redemption on the A Notes/RUNs arising from the put option granted to holders of A Notes/RUNs which is exercisable in 2011 by which the principal outstanding on the notes would be reduced to RM273.4375 million.

MARC believes that PNSB’s ability to discharge its debt obligation come 2011 will hinge on its ability to conserve liquidity at the company given its historically strong profitability and cash flow generation. Notwithstanding this, early redemption of the rated debt will likely occur if the pricing issue in relation to the water assets is brought to a successful conclusion.

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