Fitch Downgrades Bakrie Telecom to 'RD'; Recovery Rating to 'RR5'

Fri May 30, 2014 1:24am EDT

(The following statement was released by the rating agency) SINGAPORE/JAKARTA/SYDNEY, May 30 (Fitch) Fitch Ratings has downgraded Indonesia-based PT Bakrie Telecom Tbk's (BTEL) Long-Term Foreign- and Local-Currency Issuer Default Ratings to 'Restricted Default' (RD) from 'C'. The USD380m May 2015 bond fully guaranteed by BTEL has also been affirmed at 'C' while the Recovery Rating on the bond has been downgraded to 'RR5' from 'RR4'. KEY RATING DRIVERS Restricted Default: The downgrade to 'RD' follows the uncured default on a coupon payment in November 2013 and no subsequent coupon payment or public announcement about the progress of debt restructuring discussions with its creditors. DDE Inevitable: Fitch believes that a distressed debt exchange (DDE) is inevitable, which is likely to lead to a significant loss for holders of the USD380m bond. This bond is currently trading at 11 cents to the dollar, indicating high probability of a material reduction in economic value. Recovery Rating Lowered: A lower recovery rating of 'RR5' on the bond reflects a decline in the enterprise value of the business as 2014 EBITDA is likely to fall to around IDR600bn-700bn (2013: IDR911bn). BTEL will struggle to add subscribers and improve its blended average revenue per user (ARPU) in 2014. During 1Q2014, BTEL drove its ARPU down by 19% yoy to IDR13,000/month as it strove to increase its subscriber base to 12 million (1Q2013: 11.6 million). Fitch believes that BTEL would generate minimal funds flow from operations in 2014 because EBITDA will fall short of its interest and tax payments. Significant Liquidity Pressures: At end-March 2014, BTEL's liquidity was very tight with a quarterly EBITDA run rate of IDR160bn and cash balance of IDR30bn falling significantly short of its short-term debt maturities of IDR1.3trn and current liabilities of IDR3.9trn. BTEL has a low ability to refinance its bank loans and bond. M&A Unlikely: Fitch believes that a stronger operator or investor is unlikely to acquire BTEL given its Code Division Multiple Access (CDMA) technology is gradually falling out of favour with users. Other CDMA operators, including PT Smartfren Telecom Tbk (CC(idn)), continue to struggle to gain market share and face liquidity problems. The country's three biggest telcos, which use GSM technology, have sufficient spectrum assets. Market leader PT Telekomunikasi Indonesia Tbk (BBB-/Stable) and second-largest operator PT Indosat Tbk (BBB/Stable) also intend to shut their CDMA segments and reallocate the spectrum for GSM use. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to a positive rating action include: - completion of a DDE by BTEL followed by a re-rating based on a new capital structure. - an equity injection, or a M&A transaction with a larger operator or stronger investor, although both are very unlikely in the short term. Negative: Future developments that may, individually or collectively, lead to a downgrade to 'D' include: - if BTEL enters into a bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business. Contacts: Primary Analyst Nitin Soni Director +65 6796 7235 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec City Tower 4 Singapore 038986 Secondary Analyst Olly Prayudi Associate Director +62 21 29026412 Committee Chairperson Steve Durose Senior Director +61 2 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Leni Vu, Sydney, Tel: +61 2 8256 0325, Email: Leni.Vu@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage', dated 28 May 2014, and 'Distressed Debt Exchange', dated 2 August 2013, are 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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