Splash risks facing huge financial dilemma


  • Business
  • Wednesday, 14 Jul 2010

KUALA LUMPUR: If the deadlock in the plans to restructure the water sector in Selangor continues to hang on a thread with the various parties out to safeguard their widely divergent interests, then Syarikat Pengeluar Air Selangor Holdings Bhd (Splash) will face a huge financial dilemma.

Hanging on tenterhooks are bondholders of Splash’s RM1.43bil debt papers – RM1.12bil nominal amount of Al-Bai Bithamin Ajil facility and RM310mil Islamic medium-term notes.

If by year-end, there is no resolution, there’s a high likelihood that Splash will not be able to fund its requisite finance service reserve account balances by January 2011, hence breaching the covenants under its Bai Bithaman Ajil Debt Securities (BaIDS) (2000/2016).

“Right now, Splash has only been receiving 45% of its monthly billings to Syabas. This has deteriorated from 60% previously. Their receivables have also been on the rise, so yes, of course, we are concerned. But if the Minister (Green Technology, Energy and Water Minister Datuk Seri Peter Chin Fah Kui) assures us that the deadlock will be resolved, then Splash bonds should be okay,” said one fund manager who holds the Splash bonds.

Another fund manager agrees that there is little risk of defaulting now, but he remains sceptical if the deadlock can be resolved by year-end.

“We’ve had flip-flop in policies before. I will wait and see what happens. So many deadlines have been broken, so much time spent on the entire process and still, there appears to be no headway,” he said.

On Monday, Chin said he was optimistic that the deadlock would be resolved by year-end, as the matter was currently being discussed by the top leaders of the country.

He said they were in the midst of getting the right formula to make every party happy.

This will certainly be of comfort to bondholders and investors alike, whose patience is wearing thin due to the protracted impasse in the sector’s restructuring plan. Not only did it put bondholders at risk and water operators at a prime spot of going insolvent, but it also diluted the appeal of the general investing environment, said an observer.

That is why, in a desperate attempt to get the sector moving, the Malaysian Trustees wrote a letter seeking the Federal Government’s intervention.

“In a matter of months, the water operators in Selangor will not only be in default of their financial obligations, but also in danger of insolvency and may not be able to provide water to the general public in Selangor and Kuala Lumpur,” said the Malaysian Trustees.

The Malaysian Trustees is appealing to the Government to use the provision of the Water Services Industry Act 2006 to ensure that water operators are sufficiently paid to continue operations, pay their debts and expedite early resolution of the water assets restructuring scheme as a permanent solution to the overall worsening financial deficit.

The representative said this was necessary to avoid a series of anticipated defaults across the industry which would destabilise the country’s bond market.

As at end-December 2009, the bond market reached RM643.8bil or about 90% of gross domestic product.

AmResearch too, believes that there is an increasing risk of default in Selangor water bonds over the next two to three years if the current status quo remains.

On June 8, Malaysian Rating Corp Bhd (MARC) placed the companies involved in the restructuring plan “MARCWatch negative” due to the “high level of uncertainty associated with the restructuring of the sector”.

“The MARCWatch placement reflects Marc’s immediate credit concerns over the impact of Syabas’ continued inability to meet in full its monthly bulk water payment obligations to water-treatment operators as a result of the former’s unresolved water tariff hike,” MARC said.

It believes that “the significant hurdles” in the restructuring, particularly the protracted negotiations between Selangor and water companies, “do not bode favourably towards attaining a timely and orderly resolution” of the industry restructuring-related issues.

Last year, the Selangor government negotiated to take over the water assets of four concessionaires in the state because scheduled tariff hikes were as high as 37% in the present concession agreement.

Syabas, which is 70% owned by Puncak Niaga Holdings Bhd, had asked for a tariff hike by January last year. The Selangor government, however, refused to compensate Puncak Niaga and its unit Syabas for not allowing the tariff hike.

To ease its woes, Puncak Niaga has received a RM320.8mil loan from the Federal Government to help settle its debts with water treatment companies such as Syarikat Pengeluar Air Selangor Holdings Bhd and Konsortium Abass Sdn Bhd.

Recent reports indicated that the Federal Government may again extend a soft loan of RM300mil to RM400mil to plug the shortfall caused by Syabas’ inability to collect water tariffs following the free usage of the first 20 cu m per household.

Domestic consumers in Selangor who are using individual meters started enjoying the free usage from June 1.

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