Fitch Affirms Smartfren and its IDR603bn Bond at 'CC(idn)'

Fri Oct 4, 2013 2:19am EDT

(The following statement was released by the rating agency) JAKARTA/SYDNEY/SINGAPORE, October 04 (Fitch) Fitch Ratings has affirmed Indonesia-based PT Smartfren Telecom Tbk's (Smartfren) National Long-Term Rating at 'CC(idn)'. At the same time, Fitch has also affirmed Smartfren's IDR603bn bond's National Rating at 'CC(idn)'. The bond was originally IDR675bn in size and it was issued in 2007 by PT Mobile-8 Telecom Tbk, Smartfren's former legal-entity name prior to the acquisition of PT Smart Telecom. KEY RATING DRIVERS Poor Cash Flow Generation: Smartfren has been unprofitable on an EBITDA basis since 2008 as a result of its shrinking subscriber base that continued until 2010 and increasing operating expenses. However, the losses have been narrowing - to IDR500bn in 2012 from IDR1.1trn in 2011 - as its data subscriber pool expanded. Although Smartfren expects to be profitable in 2014, Fitch believes that the company will still not generate enough cash flows to meet its obligations. Reliance on Continuous Funding: Smartfren raised an additional USD90mn from First Anglo Financial and issued during H113 the last IDR600bn of mandatory convertible bonds (MCBs) from a total issue of IDR4.7trn. However, the company still does not have funds to meet its debt, interest, and lease obligations maturing in 2014 and 2015. Despite successfully reducing its losses and raising additional loans, Fitch believes that Smartfren will need to raise more funds to meet its obligations in the next two years. Uncertain Source of Funds: To meet its obligations, Smartfren has had to use equity-related funding, such as rights issues and MCBs. However, given the volatility of equity value and the uncertainty of cash receipts, the ratings do not factor in any future equity-related injections. Sources of funding to meet obligations in 2014 and 2015 are still uncertain as the company is pursuing financing options. Debt-for-equity Conversion Offer: Smartfren had previously executed debt-for-equity conversions with some bondholders and suppliers, although the conversion rates were low. The agency believes Smartfren's management may offer further debt-for-equity swaps to creditors. Fitch classifies such swaps as distressed debt exchange (DDE) in which creditors face a substantial reduction from the initial terms. A DDE would lead to the company being assigned a Restricted Default (RD(idn)) National Long-Term Rating. Weakening Competitiveness: Indonesian code division multiple access (CDMA) operators, such as Smartfren, are struggling to compete with the dominant GSM companies after losing their competitive advantage in the form of cheaper tariffs. Smartfren's weak cash flow generation and limited ability to raise additional funding make it even more difficult to compete meaningfully against GSM operators. Fitch believes that struggling CDMA players may participate in consolidation to boost their competitive positions. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Improvements in both trading and liquidity Negative: Future developments that may, individually or collectively, lead to negative rating include: - Failure to secure new funding to meet obligations - Announcement of a further debt-for-equity swap offer, which is likely to be considered a DDE Contacts: Primary Analyst Olly Prayudi Analyst +62 21 2902 6412 Fitch Ratings Indonesia Prudential Tower 20th Floor Jl. Jend. Sudirman Kav.79 Jakarta 12910 Secondary Analyst Nitin Soni Associate Director +65 67967235 Committee Chairperson Steve Durose Senior Director +61 2 8256 0307 Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: iselle.gonzalez@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(idn)' for National ratings in Indonesia. Specific letter grades are not therefore internationally comparable. Additional information is available at www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' dated 5 August 2013 and 'Distressed Debt Exchange' dated 3 August 2013, are all available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Distressed Debt Exchange here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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