Titisan Modal (M) Sdn Bhd - 2010 Credit Commentary Report

MARC has maintained a MARCWatch Negative status on Titisan Modal (M) Sdn Bhd’s (TMSB) RM738.0 million Fixed Rate Serial Bonds (FRSB) AA+(s) rating following a review of TMSB’s current credit profile. TMSB’s standalone rating has been downgraded to BBB from A+ to reflect the weak liquidity position of Konsortium Abass Sdn Bhd (Konsortium Abass) and the heightened credit risk for TMSB’s bondholders given the subordinated nature of their claims on the cash flows of water treatment operator Konsortium Abass. Konsortium Abass is a wholly-owned subsidiary of TMSB and operator of the Sungai Semenyih water treatment plant. MARC understands that Konsortium Abass recently sought a rescheduling of its bank borrowings. TMSB is expected to rely heavily on advances from holding company Kumpulan Perangsang Selangor Bhd (KPSB) to meet its October 2010 and April 2011 upcoming coupon payments of RM15.37 million each. The supported rating of AA+(s) remains on MARCWatch Negative due to concerns that indirect support from the state through KPSB may not be timely enough to address TMSB’s upcoming FRSB payment obligations.

Konsortium Abass’ revenue and pre-tax profit for financial year ended December 31, 2009 (FY2009) was in line with that of the two years preceding FY2009. However, cash flow from operation (CFO) in FY2009 of RM85.2 million was much lower compared to RM120.1 million in the previous year, reducing dividend upstream potential. The increased pressure on Konsortium Abass’ liquidity profile has created similar cash flow issues at its parent. Losses at TMSB widened in FY2009 to RM14.0 million from RM10.2 million a year earlier. Apart from coupon payments on the FRSB, TMSB will be challenged by escalating annual debt amortisation requirements beginning 2012. MARC believes that absent an extension or refinancing of the FRSB, the parent company may be unable to meet its coupon obligations under the FRSB even prior to 2012.

The relative stability of the supported rating of AA+(s) is derived from the credit strength of the Selangor state government (SSG) which had, in August 2006, issued a Letter of Support to back TMSB’s obligations in respect of FRSB. TMSB’s 55.0% shareholder KPSB is the listed investment arm of SSG-owned Kumpulan Darul Ehsan Berhad. While MARC currently views shareholders support from KPSB as strong, the MARCWatch placement incorporates the possibility of negative rating action stemming from a weakening commitment to TMSB and TMSB’s bondholders.

Resolution of the MARCWatch will be dependent upon the outcome of initiatives at TMSB or by KPSB. If TMSB is unable to raise sufficient capital and/or new debt to address its near-term obligations under the FRSB, the supported and standalone ratings could be downgraded.