Tuesday, June 8, 2010

Selangor water sector-related ratings on MARCwatch Negative

KUALA LUMPUR: Malaysian Rating Corporation Bhd is reassessing the Selangor state's water industry risk in light of the continued high level of uncertainty associated with the restructuring of the sector.

The ratings agency said on Tuesday, June 8 it had placed the ratings of all its Selangor water sector-related issuances on MARCWatch Negative.

The rating action affected Syarikat Bekalan Air Selangor Sdn Bhd RM3.0 billion BBA CP/MTN Programme MARC-1ID/AA-ID; Puncak Niaga (M) Sdn Bhd RM1.02 billion BaIDS AA ID; RM546.875 million Junior Notes A A+ and RM435.0 million RUBs A+.

Also affected are PUNCAK NIAGA HOLDINGS BHD []'s RM546.875 million RUN with RM109.375 million detachable warrants A+; RUN Holding SPV Bhd First Series of RM200 million under RM500 million CP/MTN Programme MARC-1/A+.

The others area Syarikat Pengeluar Air Sungai Selangor Sdn Bhd's RM435.0 million Islamic Notes Issuance Master Programme(comprising RM385.0 million MMTNs and RM50.0 million MCPs) MARC-1ID/AAID and Viable Chip (M) Sdn Bhd RM50.0 million BaIDS (Bank Guaranteed) AAAID (bg) and'' RM150.0 million BaIDS A+ID; Titisan Modal (M) Sdn Bhd RM738.0 million Fixed Rate Serial Bonds AA+(S).

The MARCWatch placements reflect MARC's immediate credit concerns over the impact of Syabas' continued inability to meet in full its monthly bulk water payment obligations to water treatment operators as a result of the former's unresolved water tariff hike.

Syabas' water tariff hike was scheduled to take place in January 2009 but has been deferred indefinitely. Cash flow issues at the water distributor have created spillover financial and liquidity constraints for the water treatment operators, increasing negative rating pressure on related debt issuances.

MARC believes that the significant hurdles in the restructuring process, in particular protracted negotiations between the Selangor state and water players, do not bode favourably toward attaining a timely and orderly resolution of industry restructuring-related issues.

Hence, MARC believes that the constraints on certain water treatment operators to service rated debt will become more acute in the coming quarters as debt service reserves decline and expected revenue and cash flow fall behind earlier projections. The present scenario will also pose foreseeable challenges to covenant compliance.

MARC will adjust the ratings as warranted to incorporate the shortening timeline towards a potential default for the more severely affected issuers and/or covenant breach for others upon completing its review of the aforementioned issuances for potential downgrade.

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