Published on 21 Nov 2019.
RAM Ratings has assigned a long-term preliminary rating of AAA/Stable to Starbright Capital Berhad’s (the Issuer) proposed asset-backed medium-term notes (the Notes) of up to RM700 mil. The transaction has been structured to monetise the balance of receivables due under the Termination and Settlement Agreement (TSA) dated 24 May 2019 between Pengurusan Air Selangor Sdn Bhd (Air Selangor), Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH) and Sungai Harmoni Sdn Bhd (Sungai Harmoni).
Forming a key part of the resolution of long drawn-out negotiations on the state of Selangor’s water restructuring exercise, the TSA relates to the settlement of receivables due from SPLASH to Sungai Harmoni for operations and maintenance (O&M) works performed. Under the TSA, SPLASH will pay Sungai Harmoni two amounts: (1) a settlement sum of RM715.98 mil and (2) a cut-over sum amounting to RM6.95 mil for residual O&M fees relating to Sungai Harmoni’s previous O&M Agreement.
With the first instalment of the settlement sum already fulfilled on 26 September 2019, the balance settlement sum of RM644.38 mil as well as any unpaid cut-over sum as of financial close (both to be paid over 9 equal annual instalments) alongside interest charges of 5.25% per annum earned on the remaining outstanding amount (collectively, the Receivables) will be sold to the Issuer by way of absolute legal assignment. Although the primary payment obligation lies with SPLASH, Air Selangor – its parent company – guarantees and undertakes to pay any missed instalments (including default interest of 6.75% per annum on unpaid portions of the Receivables) upon written demand. These payments will be the sole source of repayment for the Notes.
The assigned rating is underpinned by Air Selangor’s credit profile and its ability and willingness to honour its guarantee obligations under the TSA. Based on RAM’s Rating Methodology for GLEs, we view Air Selangor’s role as strategically and naturally aligned with the state government’s mandate to provide essential water services to the public. Air Selangor, as the sole licence holder of water supply and distribution services in Selangor and the Federal Territories of Kuala Lumpur and Putrajaya, is considered a dependent entity as it has a critical public policy role with no profit maximising objective. This, coupled with the State’s representation on Air Selangor’s board, supports our belief that the state government is highly likely to extend necessary financial support to Air Selangor if required. Accordingly, Air Selangor’s credit profile – and the rating of the Notes – mirror that of the state of Selangor.
Although our imputed stress scenarios indicate sufficient liquidity and cashflow to enable timely servicing of the Notes (on an ongoing basis and in the event of a full mandatory prepayment, if exercised), the transaction is sensitive to payment delays and any unexpected deviations from budgeted transaction expenses could affect the Issuer’s debt servicing ability. The transaction’s cash flow is inherently lumpy and limited to only the receivables and any reinvestment income on cash balances. Air Selangor’s failure to make good any unpaid payment obligation constitutes an event of default under the Notes. In such an event, Noteholders should be mindful of the fact that any action against SPLASH and/or Air Selangor will be limited only to the recovery of the unpaid payment obligation, together with any interest due. Payment obligations not yet due cannot be accelerated.
The transaction incorporates structural features that include an initial six-month coupon reserve, a pre-funded maintenance account for the Issuer’s annual expenses over the life of the Notes, as well as a RM1 mil cash reserve as additional liquidity support for principal redemption. The TSA gives SPLASH the option to prepay all unpaid portions of the settlement sum, together with any pro-rated interest charges at any time after the third anniversary of the upfront payment date. If this occurs, the Issuer will mandatorily prepay all outstanding Notes within five business days of receipt of the funds. The preliminary rating assigned to the Notes does not reflect the prepayment risk on the Notes.
RAM will assign the final rating for the Notes only after a satisfactory review of finalised transaction documents and relevant legal and tax opinions.
(603) 3385 2520
Chong Van Nee
(603) 3385 2482
(603) 3385 2577
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Ratings on Starbright Capital Berhad