Run Holding SPV Bhd - 2010 Credit Commentary Report

MARC has lowered the ratings on RUN Holding SPV Bhd’s (RUNH) Commercial Paper/Medium Term Notes (CP/MTN) to MARC-2 and A- with a negative rating outlook and removed the ratings from MARCWatch Negative where they were first placed on June 8, 2010. RUNH is a bankruptcy remote special purpose company incorporated solely for the purpose of issuing the notes to purchase Redeemable Unconvertible Junior Notes (RUNs) issued by Puncak Niaga Holdings Bhd (PNHB) of equivalent nominal value. PNHB is an investment holding company principally engaged in the supply and distribution of treated water through its subsidiaries: wholly-owned Puncak Niaga (M) Sdn Bhd (PNSB) and 70%-owned Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS). PNHB’s RUNs were in turn, issued against PNSB RM546.9 million Junior Notes A. The ratings and outlook on the notes are therefore principally driven by the rating on PNSB’s Junior Notes A.

The lowered ratings on the CP/MTN follow parallel downgrades of MARC’s ratings on PNHB’s RUNs and PNSB’s Junior Notes A. PNSB’s senior and subordinated debt ratings have been lowered to A+ and A-, respectively from AA- and A+ to reflect a potential liquidity shortfall by November 2011, barring an improvement in the water treatment operator’s receivables collection and absent any other mitigating developments. PNSB’s creditworthiness is currently constrained by its ability to collect its water receivables from SYABAS, Selangor state’s sole water distributor. MARC has also downgraded SYABAS’ long-term rating to A- on account of its inability to meet its monthly payment obligations in full to bulk water producers such as PNSB as a consequence of its deferred January 2009 tariff hike.

All debt servicing obligations under the notes are met from coupon payments and principal redemption proceeds received from the RUNs which are remitted directly into RUNH’s revenue account. The security agent UOB (Malaysia) Bhd, as the sole signatory for the designated accounts, ensures that all distributions to the RUNs and all issue proceeds from the notes are deposited into the revenue account and the operating account respectively. RUN SPV’s expenses and tax liabilities (if any) are met from proceeds of the notes issuance which have been set aside at the onset of the transaction. 

The outlook on the ratings is negative, reflecting the possibility that they could be lowered again if there is no meaningful intervention on the part of the federal or state government of Selangor to forestall issuer defaults.