Malaysian water asset custodian PAAB's financing conduit plans RM2b bond sale

KUALA LUMPUR (April 28): Malaysian water asset custodian Pengurusan Aset Air Bhd's (PAAB) financing conduit Pengurusan Air SPV Bhd plans to issue up to RM2 billion worth of Islamic bonds or sukuk under the Wakalah principle, according to the latest bond issue lodgement with the Securities Commission Malaysia (SC) on Tuesday (April 26).

The lodgement with the SC did not specify the purpose, duration and annual profit rate of the Sukuk Wakalah Programme, but it stated that AmInvestment Bank Bhd, CIMB Investment Bank Bhd and Maybank Investment Bank Bhd are the principal advisers.

Subsequently on Wednesday, RAM Rating Services Bhd (RAM Ratings) said it had assigned a short-term rating of P1 to Pengurusan Air SPV’s proposed Islamic commercial papers programme of up to RM2 billion, which are expected to be issued in 2022 and mature in 2029.

Meanwhile, the AAA/stable rating of the financing conduit's RM20 billion Islamic medium-term notes programme between 2009 and 2039 was reaffirmed in February 2022, RAM Ratings analysts Seri Nuralya Munawir and Chong Van Nee wrote in a note.

"The ratings are premised on our view that Pengurusan Air SPV will continue to derive substantial financial flexibility from the government of Malaysia via Minister of Finance Inc, its ultimate holding company.

"Pengurusan Air SPV is the financing conduit and a 100%-owned subsidiary of PAAB, 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. PAAB is also tasked with developing and financing water infrastructure in these areas.

"Proceeds from the proposed [RM2 billion] Islamic commercial papers programme will be used to develop water infrastructure and fund PAAB’s syariah-compliant capital expenditure, short-term working capital and general corporate purposes," the analysts said.

According to the analysts, the bond ratings for PAAB and Pengurusan Air SPV are further based on the group’s (PAAB) strategic role as the custodian of national water assets and key facilitator of the restructuring of the water industry.

They said RAM Ratings' methodology for government-linked entities considers PAAB as 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," they explained.

To date, the Ministry of Finance (MoF) has injected RM730 milllion of paid-up capital into PAAB, which has an authorised capital of RM1 billion, according to the analysts.

According to them, the MoF granted PAAB a federal loan repayment moratorium in 2020 after the latter similarly allowed state water operators (SWOs) to defer repayments amid revenue collection issues during the Covid-19 pandemic then.

"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 [bond] transaction terms require PAAB to remain as a wholly government-owned subsidiary. The breach of this term will constitute an event of default," the analysts said.

"Subsequent to the migration of SWOs in Pahang, Kedah and Perlis to the regime under the Water Services Industry Act, the total number of migrated states stands at 10. Labuan and Terengganu are still evaluating the terms offered," they added.

As PAAB’s business is inherently capital-intensive, it continued to shoulder a heavy debt burden of RM24.1 billion as at the financial year ended Dec 31, 2021 (FY21), according to the analysts.

They said PAAB's FY21 debt translated into a gearing of 20.54 times compared with FY20's 24.37 times.

"While debt coverage ratios are still weak, the group’s debt repayment obligations are well spread out. PAAB’s operating cash flows have been sufficient to cover annual interest payments, with interest coverage ratios above one times 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," Seri Nuralya and Chong said.

According to PAAB's website, the wholly-owned company of Minister of Finance Inc was incorporated on May 5, 2006 with the objective of being the holding company for Malaysia's water assets.

PAAB said it forms part of the government’s efforts to restructure the country's water services industry to achieve better efficiency and quality, as well as to ensure sustainability of the industry.

"Our main responsibility is to develop the nation’s water infrastructure in Peninsular Malaysia and the Federal Territory of Labuan, using competitive financing sourced and obtained from private financial markets.

"The water assets are then leased to water operators licensed by industry regulator Suruhanjaya Perkhidmatan Air Negara (SPAN) for operations and maintenance," PAAB said.

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