Govt May Buy Water Bonds

Thursday April 14, 2011
By YAP LENG KUEN
lengkuen@thestar.com.my


Special purpose vehicle or PAAB believed to be on standby

PETALING JAYA: Amid strong concerns voiced by water bondholders in the financial sector, the Federal Government is believed to be planning a special purpose vehicle or getting Pengurusan Asset Air Bhd (PAAB) to buy over the bonds for which some are running into an event of default.

The Finance Ministry, after receiving urgent feedback from the bondholders that include banks, the Employees Provident Fund and Great Eastern, is likely to use the time tested method of setting up a vehicle like Pengurusan Danaharta Nasional to take over the bonds, sources said.

(Danaharta is the national asset company that was set up following the 1997 Asian financial crisis to take over ailing assets).

Facilities at PAAB are also on standby; PAAB has a coffer of RM40bil, half of which is government guaranteed. After spending RM4bil to buy over water assets in three states, PAAB still has a deep pocket.

Puncak Niaga Holdings Bhd is calling for a bondholders' meeting “to seek certain waivers'' following the recent downgrades by Malaysian Rating Corp which had resulted in the rating of some of Puncak's debt to fall below the minimum required under their respective trust deeds.

“While the current rating prevails, an event of default exists on some of the group's debt wherein the revised rating is below the minimum level. If allowed to remain, further action (if any) by the respective bondholders could result in a default on the group's debt obligations,'' said Puncak, which issued RM546.88mil of redeemable unconvertible junior notes.

Analysts pointed out that the first principal payments of Syarikat Pengeluar Air Sungai Selangor Sdn Bhd (Splash) bonds were coming up in July; already, the water treatment operator's cashflow is affected as Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) had recently reduced its monthly payment to these operators to 42% of invoiced amounts from 45%.

“The Federal Government's stepping in will be a stop-gap measure,'' said a water sector analyst.

“Puncak will get to restructure its debt repayment profile by stretching the payment of interest over a longer period and possibly saving on costs via the issue of government papers, However, longer tenure bonds still command higher interest.''

The valuation of the bonds will be the next issue to be ironed out among the parties, as bond yields have changed over time, thus affecting the value of the bonds.

“A give-and-take approach should be adopted among all parties,'' opined the analyst.

The Federal Government's helping hand at this juncture may be a relief to Puncak but, on the flip side, analysts view this as giving the Government a leverage on the water industry.

This means that Puncak will probably not be able to ask for excessive compensation if they want to give up the water concession.

While the debt problem of water-related companies may be solved, the worry is that the equity side may be more complicated. The equity portion is owned by the concessionaires and shareholders which are fragmented between federal and state governments.

The two major issues confronting equity owners are the stalemate over control in distribution and sale of water and fragmented shareholding structure between state and federal governments.

Due to the continuing disagreements, the cashflow of Puncak will still be affected as the mismatch persists between payment upstream, based on pre-agreed rates, and revenue, based on existing capped rates.

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