MARC has downgraded its ratings on Syarikat Pengeluar Air Sungai Selangor Sdn Bhd’s (SPLASH) RM435 million Islamic Notes Issuance Master Programme comprising RM50 million Murabahah Commercial Papers (MCPs) and RM385 million Murabahah Medium Term Notes (MMTNs) to MARC-2ID /AID from MARC-1ID /AAID. Concurrently, the ratings have been removed from MARCWatch Negative where they were first placed on June 8, 2010. The ratings outlook has been revised to negative from developing. The lower rating reflects concerns as to the impact of increased offtaker credit risk on the water treatment operator’s credit profile as well as implications for upcoming debt maturities in May and July 2011.

Revenue of SPLASH has been stable, with the majority of its revenue coming from fixed capacity charges which constitute 70% to 80% of revenue. From January 2009, SPLASH’s capacity payment increased by 18.8% to RM48 million per month from RM40.42 million per month as per the Privatisation Agreement. As provided for the concession, the bulk supply rate has been revised from 28.00 sen/m³ to 31.68 sen/m³ for the period between 2009 and 2013. The upward revisions in the charges have resulted in higher revenue of RM726.8 million for financial year ending March 31, 2010 (FY2010) compared to RM635.7 million in FY2009 and an improved operating profit margin of 53.1% (FY2009: 48.6%). Cash flow from operations has remained stable, and is sufficient to address capital spending and debt service requirements in FY2010.

SPLASH has been cutting dividends to conserve liquidity, which contributed to a higher cash and cash equivalents as at end-March 2010 compared to a year earlier. However, its receivables have continued to accumulate as a consequence of collection challenges with respect to Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS), the sole water distributor for the state of Selangor. Although MARC estimates that SPLASH’s current liquidity and cash flow generation should be sufficient to support maturing debt obligations until May 2011, SPLASH is unlikely to have sufficient liquidity to fund its debt service reserves ahead of a large upcoming RM226.41 million debt repayment in July 2011 in the absence of any improvement in the collection of its receivables.

The negative rating outlook reflects the likelihood of a further rating downgrade if SPLASH fails to maintain sufficient internal liquidity or secure needed external funding over next several months to address upcoming debt obligations.

Contacts:
David Lee, 03-2090 2255/ david@marc.com.my;
Khairul Emran Mahmud, 03-2090 2278/ emran@marc.com.my;
Sandeep Bhattacharya, 03-2090 2247/ sandeep@marc.com.my.