MARC said today that it will continue to maintain its MARC-1ID/ A+ID and AA+(s) debt ratings on Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS) and Titisan Modal Sdn Bhd (TMSB) on MARCWatch Negative. The extended MARCWatch placements reflect the lack of positive development on the restructuring of the Selangor water sector.

The inability of SYABAS, the sole distributor of treated water for the state of Selangor and the Federal Territories of Kuala Lumpur and Putrajaya, to secure an anticipated January 2009 tariff increase continues to exert serious pressure on its balance sheet. SYABAS has only been paying for around 45% of its monthly bulk water purchases since January 2010. Its trade payables have reached unmanageable levels; its outstanding trade payables more than doubled to RM690.4 million as at end-2009. Annual payment obligations under the concession agreement which include annual charges, land charges and concession fees contribute to further strain on its finances.

Compounding its current challenges are ongoing lawsuits instituted by Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) and Konsortium Abass Sdn Bhd (KASB). SYABAS is also seeking RM471.6 million in compensation from the Selangor state government to offset revenue losses in the period from January 1, 2009 to December 31, 2009 stemming from the deferred implementation of the water tariff hike.

While no set schedule for federal government support exists, MARC notes that SYABAS had received financial support from the federal government to discharge part of its outstanding payables in December 2009 by way of a 20-year interest-free unsecured loan of RM320.8 million. The past demonstration of support provides some assurance that the federal government may extend further assistance to SYABAS to forestall industry-wide distress and defaults with respect to the Selangor water sector. 

MARC is also maintaining other issue ratings of the Selangor water sector on a negative outlook. The debt issuances affected and its current ratings are listed as follows:

Note:

Meanwhile, MARC has downgraded TMSB's standalone rating to B from BBB following operating subsidiary KASB’s failure to make a payment due on debt in August 2010 which has since been rescheduled. As a non-operating holding company, TMSB's credit profile is closely linked to that of KASB. TMSB has historically depended on upstreamed dividends from KASB to service its rated debt.
 
Currently offsetting the risk of a near-term default on coupon payments in respect of TMSB's debt is funding support from its holding company, Kumpulan Perangsang Selangor Berhad (KPSB). MARC understands that TMSB’s upcoming coupon payment in April 2011 will be advanced by KPSB similar to its recent October 2010 coupon payment.
 
MARC will monitor the progress of the discussions between bondholders of the rated debt with the issuers as well as authorities' efforts to find a solution to the current challenges. The individual debt ratings with the exception of TMSB's will likely be downgraded in the absence of meaningful developments in the first quarter of 2011 to offset continuing liquidity pressures and arrest further deterioration in issuer credit profile. Stability of TMSB's AA+(s) rating, meanwhile, depends on continued support from the Selangor Government through shareholder KPSB.

Primary Contacts:
Sandeep Bhattacharya, +603-2082 2247 / sandeep@marc.com.my;
Khairul Emran Mahmud, +603-2082 2278 / emran@marc.com.my. 

Secondary Contacts:
David Lee, +603-2082 2255 / david@marc.com.my;
Ezien Hoo, +603-2082 2267 / ezien@marc.com.my;
Nadia Edmaz Abdul Hadi, +603-2082 2262 / nadia@marc.com.my.