[RAM] RAM Ratings assigns P1 rating to Pengurusan Air SPV's proposed RM2 bil ICP Programme

RAM Ratings has assigned a short-term rating of P1 to Pengurusan Air SPV Berhad’s (PASB or the Company) proposed Islamic Commercial Papers Programme of up to RM2 bil in nominal value (2022/2029) (ICP Programme). Meanwhile, the AAA/Stable rating for its RM20 bil Islamic Medium-Term Notes (IMTN) Programme (2009/2039) was reaffirmed in February 2022. 

The ratings are 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.

Proceeds from the proposed ICP Programme will be used to develop water infrastructure and to fund PAAB’s shariah-compliant capital expenditure, short-term working capital and general corporate purposes. RAM Sustainability Sdn Bhd has assigned the respective Environmental Benefit (EB) and Social Benefit (SB) ratings to PASB’s green and social projects under the Company's Sustainability Sukuk Framework. Therefore, the ICP Programme may also be issued as a sustainability sukuk.

An irrevocable and unconditional Purchase Undertaking Deed provided by PAAB under the transaction structures gives sukukholders recourse to the Group. As such, the ratings of the sukuk reflects PAAB’s credit risks. Both PAAB and PASB are accordingly viewed in aggregate from a credit perspective. The ratings are further based on the Group’s strategic role as the custodian of national water assets and key facilitator of the water industry’s restructuring. 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 the government’s.

The government’s explicit financial backing for PAAB is evident from 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 government equity injections. To date, the Ministry of Finance (MoF) has injected a total RM730 mil of paid-up capital into the Group – total authorised capital is RM1 bil. 

The MoF granted PAAB a federal loan moratorium in 2020 after the Group similarly allowed state water operators (SWOs) to defer repayments amid collection issues during the pandemic. Owing to the Group’s critical function, we expect 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 10. Labuan and Terengganu are still evaluating the terms offered. 

As PAAB’s business is inherently capital intensive, it continued to shoulder a heavy debt burden of RM24.1 bil as end-FY Dec 2021, translating into gearing of 20.54 times (end-FY Dec 2020: 24.37 times). While debt coverage ratios are still weak, the Group’s debt repayment obligations are well spread out. PAAB’s operating cashflows have been sufficient to cover annual interest payments, with interest coverage ratios 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. PAAB 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. 

Analytical contacts
Seri Nuralya Munawir
(603) 3385 2484

Chong Van Nee, CFA
(603) 3385 2482