MARC said today that there is no immediate pressure on the ratings assigned to the Selangor water sector-related issuers following the establishment of a new state government and the recent announcements made by the new administration in respect of the water sector.  This announcement is issued in respect of the following ratings:

• Syarikat Bekalan Air Selangor Sdn Bhd’s RM3.0 billion Bai Bithaman Ajil Commercial Papers/Medium Term Notes rated MARC-1ID  / AA-ID;
• Puncak Niaga (M) Sdn Bhd’s RM1.02 billion Bai Bithaman Ajil Islamic Debt Securities, RM546.875 million Junior Notes A and RM435 million Nominal Value Redeemable Unsecured Bonds rated AAID, A+ and A+ respectively;
• Puncak Niaga Holdings Bhd’s RM546.875 million Redeemable Unconvertible Junior Notes rated A+;
• Syarikat Pengeluar Air Sungai Selangor Sdn Bhd’s RM435 million Islamic Notes Master Programme comprising RM385 million Murabahah Medium Term Notes and RM50 million Commercial Papers rated MARC-1ID / AAID;
• Titisan Modal Sdn Bhd’s RM738.0 million Fixed Rate Serial Bonds rated AA+(S);
• Viable Chip Sdn Bhd’s RM150.0 million Bai’ Bithaman Ajil Islamic Debt Securities rated A+ID; and
• Sweetwater SPV Sdn Bhd’s RM195 million Bai Bithaman Ajil Islamic Debt Securities rated A+ID.

 
Subsequent to Malaysia’s 12th general election on 8 March 2008, a new coalition government was formed in the state of Selangor.  The Selangor Chief Minister proceeded to announce that the first 20 cubic metres of water would be supplied free to consumers.  MARC is of the view that the recent developments signal increased regulatory risk which may be at the detriment to the historically strong and predictable cash flow generation capacity of concession holders.

However, at the same time, MARC notes the presence of mitigating factors.  The scale of the present and future financing requirements for the water sector and its heavy reliance on debt capital market funding suggest that it will be imperative for the water sector to retain its ability to access funding from the debt and equity markets.  Whilst consumer affordability is important, it will have to be balanced against the need for the sector to remain attractive for long-term investment.  Hence, MARC believes that new significant policy initiatives directed towards the Selangor water sector including tariff reform will likely be subject to impact assessments including an evaluation of the effects on the credit quality of affected players, their access to capital market and the cost of finance for the sector to ensure continued viability of all water concessionaires.

Furthermore, in January 2005, the parliament approved the amendments to the Ninth Schedule of the Federal Constitution to transfer matters related to water supplies and services from the State List to the Concurrent List with the exception of Sabah and Sarawak.  The amendments allow the federal government to licence and regulate water services operators.  The federal government currently maintains oversight of water treatment and distribution in place of the state government.

MARC will continue to monitor the developments closely and their impact on the credit quality of affected issuers on a case by case basis.

March 2008