RAM Ratings reaffirms AAA/Stable rating of Pengurusan Air SPV’s sukuk

RAM Ratings has reaffirmed the AAA/Stable rating of Pengurusan Air SPV Berhad’s (PASB or the Company) RM20 bil Islamic MTN Programme (2009/2039) (the Sukuk). PASB is the financing conduit 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 the nation’s water infrastructure in the aforementioned areas.  

 

Under the transaction structure, the sukukholders’ recourse to PAAB is recognised through 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 thus viewed in aggregate from a credit perspective.

 

The reaffirmation of the rating is based on RAM’s view that PAAB will continue to derive substantial financial flexibility from the Government of Malaysia (GoM). This is underpinned by the Group’s strategic role as the custodian of national water assets and key facilitator in the restructuring of Peninsular Malaysia’s and Labuan’s water industries. Based on RAM’s rating methodology for government-linked entities, PAAB is considered a dependent entity as it has been tasked with a public-policy role, under which profit generation is secondary to its key role. As such, its rating mirrors that of the GoM.

 

The GoM’s explicit financial backing for PAAB is highlighted by its guarantee on PASB’s unrated RM20 bil IMTN Programme (2011/2041) (the GG Programme) which was set up in 2011. The GG Programme is part of PASB’s financing plan to fulfil PAAB’s role in the water restructuring process. Other forms of support include a five-year moratorium on novated federal government loans and the GoM’s provision of equity injections. To date, the Ministry of Finance (MoF) has injected a total of RM730 mil of paid-up capital into PAAB – total authorised capital is RM1 bil. 

 

Following the migration of Pengurusan Air Selangor Sdn Bhd and Pengurusan Air Pahang Berhad to the regime under the WSIA in 2019 and 2020, respectively, a total of eight states have now migrated. Four states have yet to do so. Although Kedah and Perlis are expected to migrate in 1Q 2021, Labuan and Terengganu are still negotiating their migration terms. PAAB has indicated delays for several of its projects due to the three-month nationwide movement control order (MCO) imposed from March to June 2020. In conjunction with the effects of the COVID-19 pandemic, the Group has also granted a three-month moratorium (April to June 2020) to state water operators on their novated federal loans. In turn, the MoF has extended a similar moratorium on the repayment of federal loans (June to December 2020) to PAAB. Such assistance has yet to be announced following the reinstatement of various stages of the MCO in January 2021.  

 

PAAB's RM797.12 mil revenue in 3Q FY Dec 2020 represents an annualised 61% jump over fiscal 2019, thanks to lease payments from Air Selangor after the migration of the latter’s assets as well as the settlement of outstanding profit payments on the Acqua bonds. PAAB’s strengthening pre-tax profit since FY Dec 2017 was also due to the Group no longer recognising hefty depreciation charges – in line with MFRS 16 (Leases), the state water assets held by PAAB were reclassified from investment properties to finance lease receivables which are not subject to depreciation. In acquiring state water assets and the related liabilities, PAAB has to also take on their federal loans. The Group continues to issue new debt under the Sukuk, to fund its capital expenditures and retire issuances under the GG Programme. This had pushed its gearing ratio up to 20.34 times as at end-September 2020, as PAAB carried a RM23.8 bil debt burden. We expect the Group to keep gearing up as it invests in new water assets and strives to complete the restructuring of the domestic water industry. 

 

 

Analytical contact

Seri Nuralya Munawir

(603) 3385 2484

nuralya@ram.com.my

 

Media contact

Padthma Subbiah

(603) 3385 2577

padthma@ram.com.my

 

Date of release: 15 January 2021

 

 

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