MARC has affirmed its AAAID(bg) and A+ID  ratings on Viable Chip (M) Sdn Bhd’s (VCSB) RM50.0 million nominal value Bank Guaranteed Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS A) and RM150.0 million nominal value of Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS B), respectively. The AAAID(bg) rating of BaIDS A has been affirmed on the basis of an irrevocable and unconditional bank guarantee from Public Bank Bhd (PBB) in respect of which MARC maintains a financial institution rating of AAA/Stable based on publicly available information. The stable rating outlook reflects MARC’s view that the AAA rating of PBB remains firmly placed within its rating category.

The A+ID rating on BaIDS B has been affirmed on the basis of the strong operational performance of the operating entity, Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH). VCSB’s BaIDS B rating is two notches down from the senior unsecured rating of SPLASH (rated MARC-1ID /AAID) to reflect structural subordination of VCSB’s debt obligations relative to the direct obligations of SPLASH. SPLASH’s rating is moderated by its relatively high leverage and delays in payment by its sole off-taker, Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS). SYABAS has not been making full payment of its monthly billings in consequence to the deferment of its scheduled increase in water tariff of approximately 37% in January 2009, which has yet to be compensated by the Selangor State Government (SSG). MARC views the foregoing to be transitory as a result of the ongoing industry restructuring. The rating outlook on BaIDS B has been maintained at developing to mirror that of SPLASH. SPLASH has accepted SSG's third offer to acquire its water assets and operations for an estimated gross price of RM2,975 million, which consists of RM1,579 million equity value and RM1,396 million assumed liabilities. The acceptance is, however, subject to approvals from relevant authorities and execution of the transaction via sale of shares of SPLASH Holdings. 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.

VCSB is a special purpose funding vehicle wholly-owned by Kumpulan Perangsang Selangor Bhd (KPSB), a 56%-owned subsidiary of SSG-owned Kumpulan Darul Ehsan Bhd (KDEB). SPLASH Holdings is the sole shareholder of SPLASH, the concessionaire for Sungai Selangor Water Supply Scheme Phase 1 (SSP1) as well as the Sungai Selangor Water Supply Scheme Phase 3 (SSP3). Both SSP1 and SSP3 have a combined capacity to treat and supply 2,000 million litres of water per day, which makes SPLASH the largest water treatment operator in Selangor. SSP3 is built and operated under a 30-year Build-Operate-Transfer (BOT) concession expiring in 2029 while SSP1 is managed and operated under a 30-year concession also expiring in 2029.

For the past four years, SPLASH has registered a 5.7% compounded annual growth rate in revenue comprised of capacity and variable supply charges. Revenue stability is derived from the fixed-and-predictable nature of capacity charges, which represents the majority (70%-80%) of total revenue. Notwithstanding the near–term challenges of SPLASH faced in the area of revenue collectability, MARC expects the present level of collections to provide sufficient liquidity for SPLASH to address its own cash flow requirements and to continue upstreaming dividends.

VCSB receives residual cash flow sourced from SPLASH Holdings and SPLASH, which MARC regards as less certain than direct access to operating cash flows. Nevertheless, SPLASH Holdings has continued to demonstrate its capability and willingness in upstreaming dividends to VCSB.  VCSB received gross dividend of RM115.07 million during its financial year ended December 31, 2008 (FY2008) and RM55.5 million in first quarter of 2009 respectively from SPLASH Holdings. The proceeds were then advanced to its shareholder, KPSB, almost in its entirety. As at June 30, 2009, advance due from KPSB stood at RM148.3 million, which may be returned to meet VCSB’s liquidity needs. KPSB has provided an undertaking to cover shortfalls in debt service via a subordinated loan, advances, equity contributions and/or any other type of shareholder support. KPSB’s credit strength is primarily derived from its 56%-ownership by the Selangor state investment arm, KDEB. This provides liquidity support for the BaIDS in the event that upstreamed dividends or available liquidity at VCSB are insufficient to fund its debt servicing needs. VCSB has been retaining modest levels of cash beyond its upcoming debt servicing needs and after providing advances and dividends to KPSB. VCSB’s accumulated sum of RM11.65 million in the Finance Service Reserve Account is sufficient to cover the profit payment in February 2010.

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