Choppy waters for bonds

AS the pressure of a deadlock in the restructuring of Selangor's water industry builds up by the day, its negative impact is also becoming more apparent.

On Wednesday, Malaysian Rating Corp (MARC) downgraded seven water sector-related bonds while RAM Ratings had also recently maintained its negative watch over several issuances.
It has been reported that the Federal Government is likely to step in to resolve potential financial fallouts as a result of possible defaults of the water bonds worth billions of ringgit.
The restructuring process in the state is part of a larger national initiative which is being spearheaded by a RM20bil Islamic debt programme by CIMB group.

The bondholders are no minnows and include some very big names in the financial industry.
“The latest development, referring to MARC's downgrades, further validates our view that renewed attempts to find closure to Selangor's water impasse remain challenging,” said AmResearch in a report on April 6.
Indeed, more than two years have passed and nothing substantial has come out of the various attempts to consolidate the water sector in the Pakatan Rakyat-controlled state.

The delay has largely been due to disagreements over who is the rightful party to consolidate the sector and have control over its operations.
Understandably, the bondholders are getting more nervous by the day as some of the bonds issued by the water companies for the restructuring process are near to defaulting because they (the companies) have not received payments from Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), the principal concessionaire in the state.
Syabas has not been able to pay because it did not get a 37% tariff hike which it was supposed to get two years ago as the Selangor government claimed that Syabas did not fulfil certain criteria for that hike.
In the middle of all this is Puncak Niaga Holdings Bhd, a listed company which has seen its stock price fall by more than 30% since two years ago.
Puncak, which is the core water company in Selangor and controls most companies including Syabas, is said to be linked closely to Barisan Nasional. Observers say this adds political complications to the restructuring process.

Puncak concluded its latest financial year ended Dec 31, 2010 on a low note, coming in at about 80% of analysts' expectations caused largely by increasing losses in subsidiaries as a result of the non-existent tariff hike.
“The deteriorating credit profile of Syabas, as the offtaker, is likely to affect that of Puncak Niaga, whose account receivables' levels are becoming unmanageable,” said MARC.
The prolonged deadlock in the restructuring of the Selangor water sector has raised questions regarding the state and the Federal Governments' stance toward providing timely financial support to the affected issuers, particularly given the approaching debt maturities for many of the rated issues over the coming months, the rating house said.

The initial plan was for the state's water assets to be consolidated by having them taken over by a unit of the Federal Government, which will streamline the entire industry in the process and lift the burden of heavy capital expenditure from the water players so that they can focus on the operations. However, this has yet to materialise.
The water sector in the state is by far the most fragmented in the country.
The main parties involved are the Federal Government, the state government and the water players with Puncak Niaga as the main company.- TheStar