MARC has revised the outlook on its AA+(S) rating on Titisan Modal (M) Sdn Bhd’s (TMSB) RM738.0 million Fixed Rate Serial Bonds to developing from stable.  The outlook revision reflects operational uncertainty that is being created by proposals by the new Selangor State Government (SSG) to restructure the state’s water industry. MARC believes that these proposals could have either neutral or negative implications for the support incorporated into the rating. The AA+(S) rating could be rationalised to reflect TMSB’s stand-alone rating if MARC perceives a notable weakening in the state’s commitment to support TMSB’s debt servicing obligations under the bonds.

TMSB is 55.0% owned by Kumpulan Perangsang Selangor Berhad (KPSB) which is, in turn, 56.0% owned by Kumpulan Darul Ehsan Bhd, the investment arm of the SSG. The remaining shares of TMSB are owned by Operasi Murni Sdn Bhd which is, in turn, owned by four individuals. TMSB holds a 100.0% equity interest in Konsortium Abass Sdn Bhd (KASB) which was awarded a 30-year concession to rehabilitate and operate the Sungai Semenyih Water Supply Scheme by the SSG in 2001. KASB also undertook the design, finance, construction and commissioning of the Bukit Badong Distribution Works of Sungai Selangor, which has since been completed.

The reaffirmed rating is based on a letter of support provided by the SSG with respect to TMSB’s obligations relating to the serial bonds. The support, although not a guarantee, creates a strong moral obligation on the part of the SSG to support TMSB’s debt servicing obligations under the bonds. Accordingly, the rating reflects MARC’s implied rating for the state of Selangor, particularly its strong and growing economy, its balanced approach to fiscal policy, disciplined spending, moderate debt burden as well as improved liquidity.

On an unsupported or stand-alone basis, TMSB’s bonds continues to maintain an A+ rating. TMSB’s rating is notched down from the senior unsecured rating of KASB to reflect structural subordination of TMSB’s debt obligations relative to the direct obligations of KASB. TMSB receives residual cash flow sourced from KASB which MARC regards as less certain than direct access to operating cash flows. Also reflected in the rating is KASB’s predictable earnings and cash flow stream which constitutes the primary repayment source for the bonds.

The tariff structure under KASB’s Privatisation Cum Concession Agreement (PCCA), in particular the guaranteed minimum off-take quantity of the treated water, assures continued financial and cash flow stability. Coverage ratios are projected to be robust at KASB level with projected (base case) average and minimum debt service coverage ratios (DSCR) of 3.44x and 2.07x respectively during the tenor of the bonds. Scheduled increases in KASB’s bulk supply rate allow KASB to recover increases in operating costs. The credit quality of KASB’s sole offtaker, Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS) (rated AA-), supports KASB’s revenue collectibility.

KASB is currently in dispute with SYABAS over a receivable of RM2.96 million in relation to the pass through of electricity costs. The Supplemental Agreement to the PCCA is silent on the pass through of electricity costs and is pending resolution by the SSG. This is not anticipated to have a major impact on KASB, whichever direction the outcome takes. 

KASB’s operating performance has been favourable as highlighted by its stable production of treated water of 567 million litres per day (MLD) on average during the past three years relative to its minimum designated capacity of 545 MLD per year required under the PCCA. KASB continues to meet its obligations relating to asset replacement works under the PCCA. Pursuant to the PCCA, KASB is required to carry out asset replacement works worth RM619.40 million over the 30 year concession period, of which it has incurred a cumulative cost of RM163.20 million between FY2001 and FY2007.