Viable Chip (M) Sdn Bhd - 2010 Credit Commentary Report

MARC lowered its rating on Viable Chip (M) Sdn Bhd’s (VCSB) RM150 million Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS B) rating to A-ID from A+ID. The rating outlook is negative. At the same time, MARC affirmed its AAAID(bg) rating on VCSB’s RM50 million Bank Guaranteed Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS A) with a stable outlook. The ratings have been removed from MARCWatch where they had been placed in June 2010. VCSB is a special purpose funding vehicle wholly-owned by Kumpulan Perangsang Selangor Berhad (KPSB), a 60.7% owned subsidiary of Selangor state government-owned Kumpulan Darul Ehsan Bhd (KDEB). VCSB has been relying principally on dividend income from its 30% equity stake in SPLASH Holdings to meet its obligations under the BaIDS. SPLASH Holdings is the holding company and sole shareholder of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH), the concessionaire for Sungai Selangor Water Supply Scheme Phase 1 (SSP1) and Sungai Selangor Water Supply Scheme Phase 3 (SSP3).

The two-notch downgrade of VCSB’s BaIDS B rating to A-ID from A+ID incorporates the negative developments at SPLASH tempered by an undertaking provided by KPSB to provide liquidity support for the BaIDS. The undertaking obligates KPSB to cover shortfalls in debt service for the BaIDS in the event that upstreamed dividends or available liquidity at VCSB is insufficient to fund the latter’s debt servicing needs on the BaIDS. VCSB is assessed to have sufficient liquidity to meet its profit payment in February 2011, but MARC believes that there is a high likelihood that it would need to rely on support from its parent to meet its August 2011 RM20 million BaIDS A principal repayment in full and in a timely manner if current liquidity challenges persist. The AAAID(bg) rating on VCSB’s BaIDS A was affirmed on the strength of the irrevocable and unconditional bank guarantee from Public Bank Berhad which is rated AAA/Stable by MARC on a public information basis. SPLASH is the largest water treatment operator in Selangor based on the combined capacity of SSP1 and SSP3 to treat and supply 2,000 million litres of water per day (MLD). SSP3 is built and operated under a 30-year Build-Operate-Transfer (BOT) concession expiring in 2029 while SSP1 is managed and operated under a 30-year concession also expiring in 2029.

MARC believes that structural subordination risk for VCSB’s BaIDS holders has heightened as a result of SPLASH’s reduced cash flow generation and dividend upstreaming capacity. SPLASH’s senior debt rating had been lowered to A from AA by MARC to reflect mounting liquidity pressure faced by the water treatment operator as a result of ongoing challenges related to the collection of receivables from Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS). MARC believes that VCSB should have sufficient liquidity to meet its payments in February 2011. Nevertheless, there are insufficient funds to cover the first principal repayment of RM20.0 million for BaIDS A due in August 2011. KPSB may be called upon to make good on its shortfalls in debt service via a subordinated loan, advances, equity contributions and/or any other type of shareholder support. KPSB’s credit strength is primarily derived from its 60.7%-ownership of the Selangor state investment arm, KDEB. To maintain its current rating on BaIDS B of A-ID, steps must be taken to address liquidity concerns at VCSB. The negative outlook reflects the potential for a further rating downgrade absent any meaningful steps taken on the part of VCSB or its shareholders to address its 2011 debt maturity and/or mitigating developments relating to industry restructuring.