Fitch Affirms Indonesia's Indosat at 'BBB'/'AAA(idn)'; Outlook Stable

Wed Apr 2, 2014 11:57pm EDT

(The following statement was released by the rating agency) SINGAPORE/JAKARTA/SYDNEY, April 02 (Fitch) Fitch Ratings has affirmed PT Indosat Tbk's (Indosat) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB'. The agency has also affirmed the Indonesia-based company's National Long-Term Rating at 'AAA(idn)'. The Outlook is Stable on the IDR and the National Long-Term Rating. Fitch has also affirmed the foreign-currency senior unsecured rating of 'BBB'. 'AAA' National Ratings denote the highest rating assigned by Fitch on its national rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country. KEY RATING DRIVERS Reduced Ratings Headroom: Indosat's standalone credit profile of 'BB' currently has low ratings headroom. Indosat's 2014-15 funds flow from operation (FFO)-adjusted net leverage will remain at around 2.4x-2.5x (2013: 2.5x) - closer to the 3.0x threshold above which Fitch may consider negative rating action. Intense competition in the data segment and high capex requirements would prevent meaningful deleveraging and more than offset the positive impact of a 5% stake sale in PT Tower Bersama Infrastructure Tbk (BB/Stable) for IDR1.4trn (USD120m) in 2014. Lower Profitability: Indosat's 2014 operating EBITDAR margin is likely to decline to 40%-42% (2013: 43%) amid stiff competition in the data segment and higher subscriber acquisition cost as the voice market stagnates. Fitch believes that data services profitability, a key revenue growth driver, will remain much lower than that of traditional voice and text services due to lack of scale and price-based competition from smaller operators. Rupiah Depreciation: Among Indonesian telcos, Indosat is most exposed to currency depreciation as 47% of its debt is in US dollars, of which only 25% is hedged. It also pays about USD40m-45m in tower lease rentals denominated in US dollars, which further exposes its EBITDA to currency risk. During 2013, Indosat added IDR2.8trn of debt, or 0.3x on leverage, solely due to rupiah depreciation. Fitch expects Indosat to replace part of its US dollar debt with rupiah debt in 2014. Negative FCF in 2014: Indosat's 2014 FCF is likely to be negative (2013 FCF margin: -5%) as stagnant FFO will fall short of capex needed to support fast-growing data services. Capex/revenue will run high - around 33%-35% (2013: 40.5%) - as the company catches up with competitors in expanding its 3G services. At end-December 2013, Indosat had 5,400 3G base stations, much lower than PT XL Axiata Tbk's (XL, BBB/Stable) 15,000 and PT Telekomunikasi Indonesian Tbk's (Telkom, BBB-/Stable) 27,000. However, we believe that Indosat's strategy to roll out 3G technology using two spectrum bandwidths of 900MHz and 2100MHz could bring capex savings relative to competitors, which are using mostly 2100MHz. Indosat's FCF is likely to turn positive in 2015 as capex peaked in 2013. Industry Consolidation: Fitch expects the industry to consolidate or smaller telcos to raise tariffs, given their unsustainable business models. Code Division Multiple Access (CDMA) operators, including PT Bakrie Telecom (C) and PT Smartfren Telecom Tbk (CC(idn)), continue to struggle to gain market share and face liquidity problems. Indosat and market leader Telkom would likely shut their CDMA segments and reallocate the spectrum for GSM use. Support from Parent: Indosat's final 'BBB' rating continues to incorporates a three-notch uplift from its standalone credit profile of 'BB' due to its strategic importance to its parent - Ooredoo Q.S.C (Ooredoo, A+/Stable), which holds a 65% stake. Ooredoo's bond and loan documents contain a cross-default clause covering significant subsidiaries, including Indosat. Indosat is one of Ooredoo's fastest-growing subsidiaries and contributed 25% and 26% to its consolidated revenue and EBITDA respectively in 2013. RATING SENSITIVITIES Positive: Fitch expects no positive rating action as the company's leverage will remain relatively high in the medium term. Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Any weakening of the links between Indosat and Ooredoo - FFO-adjusted net leverage rising above 3.0x on a sustained basis. The ratings on the following instruments were affirmed: Indosat Palapa Co BV's 7.375% USD650m notes due 2020, guaranteed by Indosat, at 'BBB'. Indosat's 8.625% IDR1.2trn bond due 2019 at 'AAA(idn)' Indosat's 8.875% IDR1.5trn bond due 2022 at 'AAA(idn)' Indosat's 8.625% IDR300bn Sukuk Ijarah due 2019 at 'AAA(idn)' Contacts: Primary Analysts Nitin Soni (international ratings) Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec City Tower 4 Singapore 038986 Olly Prayudi (National ratings) Associate Director +62 21 29026412 Fitch Ratings Indonesia Prudential Tower 20th Floor Jl. Jend. Sudirman Kav.79 Jakarta 12910 Secondary Analyst - international ratings Olly Prayudi Associate Director +62 21 29026412 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. Additional information is available at www.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. 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