MARC has affirmed its AA+(S) rating on Titisan Modal Sdn Bhd's (Titisan Modal) RM738.0 million Fixed Rate Serial Bonds (FRSB). The developing outlook on the rating has been maintained pending the finalization of the acquisition of the water assets and liabilities of its sole operating subsidiary and bulk water concession company, Konsortium Abass Sdn Bhd (Konsortium Abass), by the Selangor State Government (SSG). Konsortium Abass has accepted the SSG's offer to acquire its water assets and liabilities for RM946 million which is sufficient to retire Konsortium Abass' outstanding debt as well as that of its parent's, Titisan Modal, including the FRSB, in full. MARC considers the transaction as neutral to the supported rating which already incorporates potential support from the SSG based on a Letter of Support issued by the state to back Titisan Modal's obligations in respect of the FRSB. MARC will maintain a developing outlook on the rating until such time when greater clarity about the detailed terms and expected timing of the transaction emerges.

The affirmed rating continues to reflect MARC's assessment of the credit strength of the SSG primarily based on publicly available information. The state's rating has also been affirmed on the basis on its sound fiscal performance, stable debt burden, disciplined spending, adequate liquidity and strong industrial sector, tempered by near-term economic uncertainty. Titisan Modal's bonds continue to be rated at A+ on an unsupported basis, a notch lower than MARC's AA- senior unsecured debt rating on Konsortium Abass to reflect structural subordination of the parent's debt obligations relative to the direct obligations at its subsidiary. Titisan Modal's affirmed stand-alone rating, meanwhile, reflects Konsortium Abass' ability to sustain strong cash flows which enables it to fund dividend distributions to its parent in addition to meeting its capital expenditure and debt service requirements.

Since MARC's last rating action on the FRSB in July 2008, the SSG has made a total of two offers to acquire Konsortium Abass' water assets and liabilities in connection with the restructuring of the Selangor water industry. The consideration for the second offer, which was made in June 2009, is RM420 million higher than that provided by the first proposal which was rejected in February 2009. MARC believes that Konsortium Abass' acceptance of SSG's offer substantially reduces the uncertainty regarding the impact of the ongoing restructuring of the water industry on Titisan Modal's credit profile. MARC takes comfort from the state government's implied intention of protecting the position of Konsortium Abass’ and Titisan Modal's existing debt holders.

Konsortium Abass' operating performance has been characterised by stable bulk water production volumes and continuing water demand. Konsortium Abass produced 570 million litres per day (MLD) in 2008 against its minimum designated capacity of 545 MLD required under its concession agreement. It posted a pre-tax profit of RM74.0 million and cash flow from operation (CFO) of RM111.8 million for the financial year ended December 31, 2008 (FY2008). Losses at holding company level widened in FY2008 to RM10.2 million from RM3.3 million a year earlier but dividends upstreamed by Konsortium Abass continued to provide adequate support for the parent company's debt service requirements. The FSRB require the maintenance of a financial service coverage ratio (FSCR) of at least 1.25 times. At December 31, 2008, Titisan Modal was in compliance with its financial covenant, with a FSCR ratio of 5.44 times for FY2008.

Contacts:
Sandeep Bhattacharya 03-2090 2247/sandeep@marc.com.my;
Khairul Emran Mahmud 03-2090 2278/emran@marc.com.my;