Thursday, Feb 06, 2003
Puncak Niaga Holdings Bhd’s (PNHB) RUN are rated the same as Puncak Niaga (M) Sdn Bhd’s (PNSB) junior notes A (A notes). The affirmation reflects a perfected security interest in the A notes and the escrow account to which matching debt service payments under the A notes will flow. The three-notch differential between the senior debt and junior debt ratings currently assigned to PNSB in turn, reflects MARC’s criteria for notching down junior debt, and the relatively high proportion of senior and secured debt that ranks ahead of the notes in liquidation. The rating however, has been placed on negative outlook due to the rising trade receivables due from Perbadanan Urus Air Selangor Bhd (PUAS). The maintenance of the present rating is subject to the outcome of the negotiations for the water distribution privatization and resolution of the burgeoning collection problem.
Being a holding company, PNHB’s revenue is dependent upon dividend receipts, management fees or asset sales. Nevertheless, based on the terms stipulated in the A notes, advances from PNSB are allowed for PNHB to undertake water-related projects. As the holder of two long-term bulk water concession agreements; namely the Privatisation Cum Concession Agreement (PCCA) and Construction Cum Concession Agreement (CCOA), both ending on 31 December 2020, PNSB generates well over 90% of the group’s consolidated revenue. It is the operator of 28 water treatment plants (WTP), with a design capacity of 1,902.52 million litres per day (MLD) or equivalent to 56% of the current treated water capacity in Selangor and Federal Territory.
Demand risks are mitigated by the take or pay payment structure for the supply of pre-determined minimum quantity of treated water to the Selangor State Government, along with the strong underlying demand for treated water in the service area. To mitigate inflation risk, the bulk supply rate is indexed to the consumer price index and major production costs (chemicals and electricity) by a fixed formula and is subject to annual adjustment. However, PNSB is currently saddled with over RM600 million debts due from PUAS which translates into approximately 14 months of outstanding receivables. Until the issue is resolved, collection problem remains a major concern.
Operation and maintenance risk is low with CGE Utilities (M) Sdn Bhd, a subsidiary of Vivendi Environnement managing the 26 water treatment facilities assisted by experienced personnel previously from JBAS. The new facilities (SSP2) are being operated and maintained by PNSB.
MARC believes the overall issue structure of the junior notes programme provides adequate protection to the note holders. A security account was established to capture payments made by PNSB under the A notes, which in turn will be utilized to meet coupon and principal payments under the RUN. By charging the security account to the RUN holders, the exposure of the noteholders to insolvency risk of PNHB is reduced. The put option at Year 10 gives PNHB the right to put the A notes to PNSB to receive the total principal outstanding under the notes on the put date in the event the RUN holders exercise their put option to PNHB. The RUN also has a call option at Year 10 which provides PNHB with the right to call back all the outstanding RUN.
Sensitivity analyses suggest that the cash flow projections are able to withstand a delay in collection of receivables of up to 21 months to maintain the minimum debt service cover ratio (DSCR) of 1.25x required under the financial covenant. The resolution of the substantial and long outstanding trade receivables is dependent on the outcome of the negotiations for the water distribution privatization.
Being a holding company, PNHB’s revenue is dependent upon dividend receipts, management fees or asset sales. Nevertheless, based on the terms stipulated in the A notes, advances from PNSB are allowed for PNHB to undertake water-related projects. As the holder of two long-term bulk water concession agreements; namely the Privatisation Cum Concession Agreement (PCCA) and Construction Cum Concession Agreement (CCOA), both ending on 31 December 2020, PNSB generates well over 90% of the group’s consolidated revenue. It is the operator of 28 water treatment plants (WTP), with a design capacity of 1,902.52 million litres per day (MLD) or equivalent to 56% of the current treated water capacity in Selangor and Federal Territory.
Demand risks are mitigated by the take or pay payment structure for the supply of pre-determined minimum quantity of treated water to the Selangor State Government, along with the strong underlying demand for treated water in the service area. To mitigate inflation risk, the bulk supply rate is indexed to the consumer price index and major production costs (chemicals and electricity) by a fixed formula and is subject to annual adjustment. However, PNSB is currently saddled with over RM600 million debts due from PUAS which translates into approximately 14 months of outstanding receivables. Until the issue is resolved, collection problem remains a major concern.
Operation and maintenance risk is low with CGE Utilities (M) Sdn Bhd, a subsidiary of Vivendi Environnement managing the 26 water treatment facilities assisted by experienced personnel previously from JBAS. The new facilities (SSP2) are being operated and maintained by PNSB.
MARC believes the overall issue structure of the junior notes programme provides adequate protection to the note holders. A security account was established to capture payments made by PNSB under the A notes, which in turn will be utilized to meet coupon and principal payments under the RUN. By charging the security account to the RUN holders, the exposure of the noteholders to insolvency risk of PNHB is reduced. The put option at Year 10 gives PNHB the right to put the A notes to PNSB to receive the total principal outstanding under the notes on the put date in the event the RUN holders exercise their put option to PNHB. The RUN also has a call option at Year 10 which provides PNHB with the right to call back all the outstanding RUN.
Sensitivity analyses suggest that the cash flow projections are able to withstand a delay in collection of receivables of up to 21 months to maintain the minimum debt service cover ratio (DSCR) of 1.25x required under the financial covenant. The resolution of the substantial and long outstanding trade receivables is dependent on the outcome of the negotiations for the water distribution privatization.