PAAB to acquire water bonds

Written by Sharon Tan

Edge Financial Daily, 25 May 2011

KUALA LUMPUR: The Selangor water impasse appears to have finally been broken. Syarikat Pengurusan Aset Air Bhd (PAAB) will acquire the securities issued by the Selangor state water concessionaires through its-wholly owned subsidiary Acqua SPV Bhd. The conditional offer amounting to RM6.5 billion, which expires on May 31, would see Acqua SPV paying the settlement value for the securities based on the purchase yield to maturity, according to sources familiar with the matter. This latest development confirms a front page story in The Edge Financial Daily on May 12, 2011 that the federal government and PAAB were said to have finalised a RM6.5 billion proposal to take over the Selangor state’s water-related bonds, and that an offer was likely to be made within two weeks. It is learnt that Acqua SPV is offering a yield of between 4.83% and 7.36% for the remaining tranches of bonds maturing in 2013 to 2023. “The yield price offered basically allows most bondholders to get out with a profit. “For the 2021 paper, the buyback yield is at 5.82% against mark to market at the end of last month at 14.2%. This means that in terms of price, the buying back is at 94.49 against mark to market value of only 54.54 at the end of last month,” said a source. The bondholders are understood to include Great Eastern Life Assurance (M) Bhd, CIMB Group Holdings Bhd, the Employees Provident Fund (EPF) and Kumpulan Wang Amanah Pencen. Among the water players in Selangor is Puncak Niaga Holdings Bhd, which has two concessions — Puncak Niaga (M) Sdn Bhd, a treatment player and its 70%-owned unit Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), a distributor. Puncak Niaga is controlled by Tan Sri Rozali Ismail. Another company which has a water treatment concession is Syarikat Pengeluar Air Sungai Selangor Holdings Bhd (Splash), which is 40%-controlled by construction giant Gamuda Bhd, and 30% each by Kumpulan Perangsang Selangor Bhd (KPS) and Tan Sri Wan Azmi Wan Hamzah’s The Sweet Water Alliance Sdn Bhd.  KPS is 60.7%-controlled by Kumpulan Darul Ehsan Bhd, the Selangor state investment arm. The other water treatment concessionaire is Konsortium Abass Sdn Bhd, which is 55%-controlled by KPS and 45% by Operasi Murni Sdn Bhd. An analyst said the government’s takeover of the bonds was imminent since there are repayments due in the next couple of months. He said the RM6.5 billion offer from the federal government, after a RM200 million discount, will be spread out among the bondholders. “But the interesting part is the equity side. This remains to be seen. The bond issues can be solved but the equity is another ball game. The bottom line is both the Selangor and federal governments want control. They want to champion cheap water. “In this instance, the state government also has a stake in the water supply chain,” he said. The analyst also said there was a disconnect between the federal government and the state government where the valuation of physical assets is concerned. The state owns about 80% of the physical assets such as pipes and water treatment plants. “PAAB will still have to pay for these assets ultimately,” he added. A bondholder said the acquisition was expected as it is in line with the consolidation of the water industry to ensure the sustainability of investor confidence for infrastructure and utility projects in Malaysia. “The acquisition will simplify the credit risk of what was previously a fragmented and complicated group of utility bonds, which were built on a web of SPVs (special-purpose vehicles” he said. Asked if the RM6.5 billion figure that has been bandied about was a fair number for the bondholders, he replied: “At the end of the day, the acquisition monies required would at least closely reflect the bonds’ outstanding nominal value. “However, from an investor’s standpoint, a more holistic approach to overall returns should be addressed. For example, much management time was wasted during lengthy and numerous meetings in the initial stages of the water bonds’ financial distress, and [this] does not compensate investors for lowered yields and stretched payback periods after the acquisition.” On Monday, Energy, Water and Green Technologies Minister Datuk Seri Peter Chin Fah Kui said the Cabinet would decide on the acquisition of the Selangor water bonds but to date there is no Cabinet paper on the matter. “It is for the Cabinet to decide. The paper has not gone in yet. Wait for the paper to be submitted to the Cabinet,” Chin told the media when asked if the federal government would take over the water bonds. Petaling Jaya Utara MP Tony Pua meanwhile, said in a statement any move by the government to bail out the debts of the privatised Selangor water companies has in effect killed any remaining possibility of the state government striking a deal with the companies to restructure and take over the water industry in Selangor. Pua said had there been no bailout offered by the federal government, the companies would have to negotiate the terms of restructuring with the state government or other parties that have made offers to acquire the businesses and assets. The Selangor government had made several offers to acquire the water companies. In January, it made an offer of more than RM9 billion for the water assets. Prior to that, in April last year, Gamuda made a RM10.75 billion offer to take over the water assets in Selangor. A month earlier, the federal government via PAAB made an offer to acquire all the water assets from the concessionaires for RM8.3 billion. “However, as a result of the federal government bailing out the massive debts, it has relieved these companies of their cash flow problems.  This will mean that there is now no urgency for these companies to agree to any form of restructuring as desired under the Water Services Industry Act (2006) as they now have the upper hand at the negotiating table at the expense of the rakyat. “In fact, the likely outcome of the bailout is that the federal government will follow up with the taking over of the water-related assets. The privatised water concessionaires will continue to operate and profit from the provision of water services in Selangor, without being burdened by debts,” said Pua, adding that Chin ought to clarify the move for the bailout.