Thursday, Nov 29, 2001
MARC has assigned a long term rating of A to Puncak Niaga Holding Bhd’s (PNHB) RM546.88 million Redeemable Unconvertible Junior Notes (RUN) with detachable warrants. Proceeds from the new debt offering will be used to fund PNHB’s subscription of subsidiary, Puncak Niaga (M) Sdn Bhd’s (PNSB) junior notes A (A notes). PNHB’s RUN are rated the same as PNSB’s A notes. The RUN’s rating reflects a perfected security interest in the A notes as well as 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 a liquidation.
Being a holding company, PNHB does not have direct access to the cash flow of its member companies and is very dependent upon dividend receipts, management fees derived from its subsidiaries, asset sales or external financing. 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 95% of the group’s consolidated revenue. PNSB is the operator of the 26 water treatment plants (WTP) formerly run by Jabatan Bekalan Air Selangor and the newly constructed Sg. Selangor Phase 2 Water Supply Scheme (SSP2) 950 MLD water treatment plant. The proceeds from PNSB’s A notes will be used to refinance its existing debts and for additional working capital.
Demand risks for both the water concessions are mitigated by the concession “take or pay” payment structure, which provides for the supply of pre-determined minimum quantity of treated water to a creditworthy off-taker, along with the strong underlying demand for treated water in the service area. PNSB supplies bulk water to the Selangor State Government in return for a monthly volume payment (subject to a minimum offtake quantity) comprising the bulk supply rate multiplied by the actual volume of treated water supplied. 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. Under the CCOA, PNSB will also receive a fixed monthly fee.
The operational risks of the 26 WTPs are low given the involvement of CGE Utilities, the third-party services company responsible for the operation and maintenance of the 26 WTPs. 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 will be 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 on the part of PNHB is reduced. The A notes have a tenure of 15 years and a put option at Year 10, giving 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.
While MARC believes PNSB’s underlying cash flow is more than sufficient to fulfil the repayment obligation in the event the put option is exercised, the existence of a put option somewhat reduces the financial flexibility of PNHB and indirectly, PNSB. However, MARC takes comfort on the robustness of PNSB’s cash flow. Simulated stress test indicated a projected net cash position of RM1.1 billion at the exercise date while the annual debt service coverage ratio and debt to equity ratio averaged above 2.5x and below 3.0x respectively during the tenure of the notes.
Being a holding company, PNHB does not have direct access to the cash flow of its member companies and is very dependent upon dividend receipts, management fees derived from its subsidiaries, asset sales or external financing. 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 95% of the group’s consolidated revenue. PNSB is the operator of the 26 water treatment plants (WTP) formerly run by Jabatan Bekalan Air Selangor and the newly constructed Sg. Selangor Phase 2 Water Supply Scheme (SSP2) 950 MLD water treatment plant. The proceeds from PNSB’s A notes will be used to refinance its existing debts and for additional working capital.
Demand risks for both the water concessions are mitigated by the concession “take or pay” payment structure, which provides for the supply of pre-determined minimum quantity of treated water to a creditworthy off-taker, along with the strong underlying demand for treated water in the service area. PNSB supplies bulk water to the Selangor State Government in return for a monthly volume payment (subject to a minimum offtake quantity) comprising the bulk supply rate multiplied by the actual volume of treated water supplied. 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. Under the CCOA, PNSB will also receive a fixed monthly fee.
The operational risks of the 26 WTPs are low given the involvement of CGE Utilities, the third-party services company responsible for the operation and maintenance of the 26 WTPs. 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 will be 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 on the part of PNHB is reduced. The A notes have a tenure of 15 years and a put option at Year 10, giving 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.
While MARC believes PNSB’s underlying cash flow is more than sufficient to fulfil the repayment obligation in the event the put option is exercised, the existence of a put option somewhat reduces the financial flexibility of PNHB and indirectly, PNSB. However, MARC takes comfort on the robustness of PNSB’s cash flow. Simulated stress test indicated a projected net cash position of RM1.1 billion at the exercise date while the annual debt service coverage ratio and debt to equity ratio averaged above 2.5x and below 3.0x respectively during the tenure of the notes.