Published on 03 Dec 2020.
RAM Ratings has assigned a preliminary rating of AAA/Stable to the proposed RM630* mil Senior Notes to be issued under Glacier Assets Berhad’s (Glacier Assets or the Issuer) RM800 mil Asset-backed Medium-Term Notes facility (the MTN Facility). The proposed issuance involves eight tranches of Senior Notes with yearly repayments and rank above an unrated tranche of Junior Notes. The Senior Notes will be backed by receivables due from Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (SPLASH or the Obligor).
Glacier Assets was set up by Gamuda Water Sdn Bhd (Gamuda Water or the Originator) to monetise the balance of receivables due under the Termination and Settlement Agreement (TSA) between Pengurusan Air Selangor Sdn Bhd (Air Selangor), SPLASH and Gamuda Water. Forming a key part of the resolution of long drawn-out negotiations on Selangor’s water restructuring exercise, the TSA relates to the settlement of receivables due from SPLASH to Gamuda Water for the supply of treated water and operations and maintenance (O&M) works performed. Although the primary payment obligation lies with SPLASH, Air Selangor – its parent company – will pay Gamuda Water any missed instalments within a predefined period of the scheduled due dates.
Under the TSA, the aggregated fees and charges payable are split into two amounts – a Settlement Sum of RM762.45 mil and a Cut-Over Sum of RM7.58 mil. The balances of the Settlement Sum and Cut-Over Sum, excluding the upfront payment of the Settlement Sum (RM76.24 mil) and partial payment of the Cut-Over Sum (RM 3.07 mil), are payable in nine yearly instalments commencing from 26 September 2020, the first of which was paid on the actual date of payment made.
The unpaid balances of the Settlement Sum and Cut-Over Sum together with interest charges of 5.25% per annum earned on the unpaid amount, with a combined value of RM759.01 mil and payable in eight annual instalments (Annual Instalments), will be sold to the Issuer as a “true sale” by way of absolute legal assignment.
Given that Glacier Assets’ only source of cashflow is the Annual Instalments due from SPLASH and ultimately from Air Selangor, the assigned rating for the Senior Notes is underpinned by Air Selangor’s credit profile which in turn mirrors that of the Selangor state government (SSG). Based on RAM’s Rating Methodology for Government-linked Entities, we consider Air Selangor a dependent entity in view of its critical public policy role as the sole licence holder for water supply and distribution services in Selangor and the Federal Territories of Kuala Lumpur and Putrajaya. This, coupled with the SSG’s representation on Air Selangor’s board, supports our view that the former is highly likely to extend necessary financial support if required.
The TSA gives SPLASH the option to: (1) prepay all or part of the unpaid portion of the Settlement Sum at any time but only in inverse order of scheduled due dates and (2) prepay the entire unpaid portion of the Cut-Over Sum. In this regard, we are of the view that liquidity risk is adequately addressed by prepayment terms of the Senior Notes which mirror that of the TSA. Failure on the part of SPLASH and/or Air Selangor to meet any Annual Instalment will constitute an event of default in respect of the facility. The declaration of an event of default will allow noteholders to enforce their rights under the transaction documents. That said, all Annual Instalments not yet due cannot be accelerated, unless Air Selangor is declared insolvent.
Our assessment also factors in the transaction’s structural features, such as a pre-funded SPV Maintenance Account to meet the Issuer’s estimated taxes and expenses over the tenure of the Notes, as well as a prefunded Escrow Account to meet the first coupon payment on the Senior Notes (due in June* 2021). An Early Redemption Account (ERA) will also be opened and prefunded to meet early redemption premium charges (Minimum ERA Balance) in the event of an early redemption of Senior Notes.
The finite nature of the Issuer’s cashflow leaves little room for any material deviation from RAM’s base-case assumptions. Our stress analysis on reinvestment rates, payment delays and prepayments indicate sufficient liquidity and cashflow to enable full and timely servicing of the Senior Notes. Timing differences between the due dates of Annual Instalments (starting September 2021) and payment dates of the Senior Notes (starting December* 2021) provide a three*-month buffer against any potential delay in payments from the Obligor. Except for funds in excess of the Minimum ERA Balance in the ERA, no payment is allowed under the Junior Notes until all Senior Notes have been fully redeemed, mitigating any cashflow leakage.
RAM will assign a final rating to the Senior Notes after a satisfactory review of finalised transaction documents and relevant legal and tax opinions.
* Items marked with an asterisk may change before the assignment of a final rating.
1 As amended and supplemented by the Supplemental Termination and Settlement Agreement dated 18 May 2020.
Lee Siew Xuen
(603) 3385 2539
Tan Han Nee
(603) 3385 2529
(603) 3385 2577
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Ratings on Glacier Assets Berhad