Thursday, Jan 19, 2006
MARC has affirmed SAJ Holdings Sdn Bhd’s (SAJH) RM1.28 billion Bai Bithaman Ajil Serial Bonds (BaIDS) long-term rating of AA-ID with a Developing Outlook. The rating is supported by its proven operating and financial performance track record; Johor state’s growing water demand; a tariff setting mechanism that provides for an agreed rate of return to the company and a fairly tight issue structure. The Developing Outlook, however, reflects the proposed restructuring scheme of the water supply services in Johor.
Under the CA, the tariff setting mechanism is premised upon SAJH achieving a pre-determined internal rate of return (IRR) and the Johor State Government (JSG) is obliged to gazette tariffs or pay compensation to SAJH in circumstances where the gazetted tariff is lower than the applicable Agreed Tariff or implementation has been delayed, provided the IRR is within the agreed band of 14% and 18%. However, the 2006 Tariff Review (which was consented in 2003) was not agreeable by JSG as it will result in SAJH’s IRR exceeding the agreed upper band. In turn, JSG has consented to a lower tariff hike, which will only be implemented in 2007 (i.e. one year delay from the actual timing for tariff revision). Correspondingly, JSG has discharged SAJH from the payment obligations (Fixed Monthly Payment and Bulk Sales Rate Payment) required in the CA and, concurrently, entered into a Water Supply Agreement (WSA) with the Special Purpose Vehicle (SPV) namely Johor Special Water Sdn Bhd, a company wholly owned by JSG. The SPV will buy treated water from the water operators and resell to SAJH for a period of three months. SAJH, in turn, will pay the SPV for the sum up to RM90 million based on the scheduled payments as stipulated in the WSA, starting from 2007 to 2013. Hitherto, the WSA has been signed by the relevant parties and executed on 30 December 2005. As part of the proposed restructuring exercise, SPV shall also, subject to certain terms and conditions, enter into a Lease Agreement with SAJH for the lease of water treatment assets upon the expiry of the water supply period. The total lease payments shall be up to RM1,015 million and payable according to the rent payment schedule set out in the Lease Agreement. Via the proposed scheme, SAJH expects to save about RM880 million and therefore strengthen its cash flow protection measures.
Nonetheless, SAJH will be adversely impacted if smaller tariff hikes are implemented in year 2009 for domestic and industrial categories respectively. These could result in a lower Finance Service Coverage ratio position.Compensation from JSG should be forthcoming for any revenue loss, provided the IRR is within the agreed band. Hence, the strength of SAJH’s cashflow lies in tariff adjustment review, compensation payment and/or other cost containment measures.
SAJH also has the flexibility to defer some of the capital expenditure to commensurate for the lower tariff hike, thus, reducing the strain on the cashflow resulting from the revenue loss. In addition, SAJH has indicated that negotiation is under progress in respect of the conversion of certain concession charges into grants for the implementation of the Rural Water Supply programme. Should the conversion be agreed upon, this would translate into lower operational costs, thus protecting if not improving SAJH’s cashflow and financial performance.
The increase in revenue during FY2004 was attributable to the annual increase in water consumption. However, pretax profit was impacted by high finance costs due mainly to the drawdown of the RM1.28 billion BaIDS. As for interim results, SAJH had performed favourably with pretax margin of 30.5% against projected margin of 27.4%. Going forward, SAJH’s revenue growth is expected to be mainly driven by the increasing industrial demand which accounted for more than 50% of water revenue historically. Based on the debt to equity ratio defined in the trust deed, SAJH’s debt leverage was 1.50x, which was significantly below the covenanted proportion of 70:30. SAJH’s leverage is expected to improve with the amortization of the BaIDS starting in 2010 and the expected accumulation of reserves.
Supporting the affirmation is also the tight issue structure where priority ranking has been accorded to the BaIDS payment obligations under the payment waterfall. In addition, the maintenance of the Finance Payment Accounts (FPA) ensures that funds are gradually built up to meet debt service while the second level of protection is in the form of a six-monthly liquidity buffer maintained in the Finance Service Reserve Account (FSRA).
Under the CA, the tariff setting mechanism is premised upon SAJH achieving a pre-determined internal rate of return (IRR) and the Johor State Government (JSG) is obliged to gazette tariffs or pay compensation to SAJH in circumstances where the gazetted tariff is lower than the applicable Agreed Tariff or implementation has been delayed, provided the IRR is within the agreed band of 14% and 18%. However, the 2006 Tariff Review (which was consented in 2003) was not agreeable by JSG as it will result in SAJH’s IRR exceeding the agreed upper band. In turn, JSG has consented to a lower tariff hike, which will only be implemented in 2007 (i.e. one year delay from the actual timing for tariff revision). Correspondingly, JSG has discharged SAJH from the payment obligations (Fixed Monthly Payment and Bulk Sales Rate Payment) required in the CA and, concurrently, entered into a Water Supply Agreement (WSA) with the Special Purpose Vehicle (SPV) namely Johor Special Water Sdn Bhd, a company wholly owned by JSG. The SPV will buy treated water from the water operators and resell to SAJH for a period of three months. SAJH, in turn, will pay the SPV for the sum up to RM90 million based on the scheduled payments as stipulated in the WSA, starting from 2007 to 2013. Hitherto, the WSA has been signed by the relevant parties and executed on 30 December 2005. As part of the proposed restructuring exercise, SPV shall also, subject to certain terms and conditions, enter into a Lease Agreement with SAJH for the lease of water treatment assets upon the expiry of the water supply period. The total lease payments shall be up to RM1,015 million and payable according to the rent payment schedule set out in the Lease Agreement. Via the proposed scheme, SAJH expects to save about RM880 million and therefore strengthen its cash flow protection measures.
Nonetheless, SAJH will be adversely impacted if smaller tariff hikes are implemented in year 2009 for domestic and industrial categories respectively. These could result in a lower Finance Service Coverage ratio position.Compensation from JSG should be forthcoming for any revenue loss, provided the IRR is within the agreed band. Hence, the strength of SAJH’s cashflow lies in tariff adjustment review, compensation payment and/or other cost containment measures.
SAJH also has the flexibility to defer some of the capital expenditure to commensurate for the lower tariff hike, thus, reducing the strain on the cashflow resulting from the revenue loss. In addition, SAJH has indicated that negotiation is under progress in respect of the conversion of certain concession charges into grants for the implementation of the Rural Water Supply programme. Should the conversion be agreed upon, this would translate into lower operational costs, thus protecting if not improving SAJH’s cashflow and financial performance.
The increase in revenue during FY2004 was attributable to the annual increase in water consumption. However, pretax profit was impacted by high finance costs due mainly to the drawdown of the RM1.28 billion BaIDS. As for interim results, SAJH had performed favourably with pretax margin of 30.5% against projected margin of 27.4%. Going forward, SAJH’s revenue growth is expected to be mainly driven by the increasing industrial demand which accounted for more than 50% of water revenue historically. Based on the debt to equity ratio defined in the trust deed, SAJH’s debt leverage was 1.50x, which was significantly below the covenanted proportion of 70:30. SAJH’s leverage is expected to improve with the amortization of the BaIDS starting in 2010 and the expected accumulation of reserves.
Supporting the affirmation is also the tight issue structure where priority ranking has been accorded to the BaIDS payment obligations under the payment waterfall. In addition, the maintenance of the Finance Payment Accounts (FPA) ensures that funds are gradually built up to meet debt service while the second level of protection is in the form of a six-monthly liquidity buffer maintained in the Finance Service Reserve Account (FSRA).