Published on 11 Feb 2022.
RAM Ratings has reaffirmed the AAA/Stable rating of Pengurusan Air SPV Berhad’s (PASB or the Company) RM20 bil Islamic Medium-Term Notes (IMTN) Programme (2009/2039) (the Sukuk).
The reaffirmation of the rating is premised on our view that PASB will continue to derive substantial financial flexibility from the Government of Malaysia via Minister of Finance (Incorporated), its ultimate holding company. PASB is the financing conduit and 100%-owned subsidiary of Pengurusan Aset Air Berhad (PAAB or the Group), the national water asset company mandated to facilitate the water restructuring exercise in Peninsular Malaysia and the Federal Territory of Labuan under the Water Services Industry Act 2006 (WSIA). PAAB is also tasked with developing and financing water infrastructure in these areas.
Under the transaction structure, the sukukholders’ recourse to PAAB is recognised by an irrevocable and unconditional Purchase Undertaking Deed provided by the Group. As such, the rating of the Sukuk reflects PAAB’s credit risks. Both PAAB and PASB are accordingly viewed in aggregate from a credit perspective. The rating is further based on the Group’s strategic role as the custodian of national water assets and key facilitator of the restructuring of Peninsular Malaysia’s and Labuan’s water industries. RAM’s rating methodology for government-linked entities considers PAAB a “dependent” entity in view of its public policy role, where profit generation is secondary. Therefore, the Group’s rating essentially mirrors that of the government.
The government’s explicit financial backing for PAAB is illustrated by a guarantee on PASB’s unrated RM20 bil IMTN Programme (2011/2041) (the GG Programme), which was part of PASB’s financing plan to enable PAAB to fulfil its role in the water restructuring process. Aside from enjoying the lower funding costs of the GG Programme, PAAB also received equity injections from the government. To date, the Ministry of Finance (MoF) has injected a total RM730 mil of paid-up capital into PAAB – total authorised capital is RM1 bil.
The MoF also granted PAAB a federal loan moratorium last year after the Group similarly allowed state water operators (SWOs) to defer repayments amid collection issues during the pandemic. Owing to Group’s critical function, RAM expects the government to maintain close oversight via PAAB’s Board while extending financial assistance when the need arises. The transaction terms require PAAB to remain a wholly government-owned subsidiary – the breach of this term will constitute an event of default.
Subsequent to the migration of SWOs in Pahang, Kedah and Perlis to the regime under the WSIA, the total number of migrated states stands at ten. Labuan and Terengganu are still evaluating the migration terms offered.
In FY Dec 2020, PAAB’s net profit halved to RM116.38 mil (FY Dec 2019: RM221.46 mil) after it incurred heftier tax expenses of RM301.08 mil. This was caused by a one-off adjustment on the Group’s treatment of capital allowances in prior years. Based on the Group’s unaudited accounts, its net profit is expected to normalise to RM262.70 mil in view of tax regularisation.
Given that PAAB’s business is inherently capital intensive, it continued to shoulder a heavy debt burden of RM24.1 bil as at end-fiscal 2021, translating into gearing of 20.54 times (end-fiscal 2020: 24.37 times). While debt coverage ratios are still weak, the Group’s debt repayment obligations are well spread out. Furthermore, PAAB’s operating cashflows have been sufficient to cover annual interest payments, with interest coverage ratios of above 1 time over the last few years. We believe the Group can easily tap the sukuk market for additional funding in view of its crucial function and relationship with the government. The Group is expected to continue to gear up as it invests in new water assets and strives to complete the restructuring of the domestic water industry.
Seri Nuralya Munawir
(603) 3385 2484
Chong Van Nee, CFA
(603) 3385 2482
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