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March 17 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed PT Tower Bersama Infrastructure Tbk's (Tower Bersama) Long-Term Issuer Default Ratings at 'BB'. At the same time, the agency affirmed the National Long-Term Rating at 'AA-(idn)'. The Outlooks for the ratings are Stable. A full list of rating actions is at the end of this commentary.
Fitch affirmed the ratings notwithstanding Tower Bersama's FFO-adjusted net leverage remaining above 4.0x, the threshold at which a negative rating action may be considered. Tower Bersama's FFO-adjusted net leverage was 5.4x at end December 2013, following higher debt to fund telecommunications tower building activity during 2013. However, the agency expects leverage to return below its negative guideline in the medium-term thanks to rising cash flows from long-term contracts with EBITDA margins above 80%. The risk of higher leverage is also offset by a stronger customer portfolio, with a higher proportion of revenue from investment-grade operators.
'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherently differs only slightly from that of the country's highest rated issuers or obligations.
Growth Keeps Leverage High: Tower Bersama's leverage in 2013 remained high, mainly driven by higher borrowings to fund new base station sites for orders from telecommunication operators, especially PT Telekomunikasi Selular (Telkomsel, BBB/Stable). Tower Bersama's base station tower building activity reached its peak in 2013 with 1,800 towers built (2012: 1,144). Fitch expects leverage to remain above our negative guideline of 4.0x in 2014 and 2015. However, Fitch believes that this will not be sustainable and FFO-adjusted net leverage will fall below 4.0x in 2016.
Acquisitions May Slow Deleveraging: As the second-largest telecommunications tower provider in Indonesia in terms of the number of towers, Tower Bersama has limited opportunity to acquire smaller tower portfolios from other tower companies. However significant tower acquisitions might materialise if operators such as PT Telekomunikasi Indonesia Tbk (BBB-/Stable), PT Indosat Tbk (BBB/Stable) and PT XL Axiata Tbk (XL, BBB/Stable) decide to divest their tower portfolios. In Fitch's view, any opportunistic acquisitions would result in slower deleveraging than the agency currently expects and put further pressure on the rating.
Better Tenant Mix: Tower Bersama's customer portfolio has improved, with revenue contribution from investment-grade telcos increasing to 75% in 2013 from 70% in 2012. The better quality of Tower Bersama's tenant mix offsets its higher leverage. It is rated at a similar level as the largest telecommunications tower provider in Indonesia, PT Profesional Telekomunikasi Indonesia (Protelindo, BB/Stable), which has FFO-adjusted net leverage of below 4.0x but derives less than 50% of its revenue from investment-grade telcos.
Although Tower Bersama continues to face risk from its exposure to struggling CDMA players, Fitch expects that tenant composition will further skew towards investment-grade operators as they continue their investments in network expansion. We also expect revenue contribution from investment-grade telcos to further rise to above 75% after XL completes its acquisition of PT Axis Telekom Indonesia in March 2014.
Solid Margin, Predictable Cash Flows: Tower Bersama's ratings benefit from its solid profitability and revenues that are backed with long-term non-cancellable contracts. Tower Bersama posted EBITDA margin of 81.9% in 2013, up from 81.5%in 2012. The company's cash flows are also highly predictable with locked-in revenue of USD1.9bn at end September 2013, with average contract period of its portfolio at 7.3 years.
Strong Access to Funding: Tower Bersama's liquidity is further supported by its strong access to bank borrowings with USD262m in unutilised working capital facilities. The company also has a track record in bond markets with both local currency and foreign currency issuances. The company plans to gradually replace secured debt at the operating company level with unsecured debt at the holding company level. In addition, the company plans to minimise its currency exposure by having more rupiah-denominated borrowings.
Currency Exposure Is Manageable: Tower Bersama has about USD887m in foreign-currency debt, forming 81% of its overall debt. More than 90% of its debt is protected through a combination of hedging contracts and a natural hedge from USD40m in annual revenue (18% of total revenue). The company recorded IDR854bn (USD75m) of cash (including restricted cash) at the end of December 2013 in which USD56m was denominated in US dollars.
Fitch expects no positive rating action as the company's leverage will remain high in the medium-term.
Negative: Future developments that could individually or collectively lead to negative rating actions include:
- A debt-funded acquisition of another tower portfolio or lease defaults by weaker telcos leading to FFO-adjusted net leverage remaining above 4.0x on a sustained basis.
- A fall in revenue contribution from investment-grade telcos to below 50%.
- Any event that causes Fitch to revise its projections, such that Fitch no longer forecasts the company's FCF to turn positive in 2015.
Full list of rating actions:
Long-Term Foreign Currency Issuer Default Rating affirmed at 'BB'; Outlook Stable
Long-Term Local Currency Issuer Default Rating affirmed at 'BB'; Outlook Stable
National Long-Term Rating affirmed at 'AA-(idn)'; Outlook Stable
Foreign currency senior unsecured rating affirmed at 'BB'
USD300m guaranteed senior unsecured notes issued by TBG Global Pte Ltd affirmed at 'BB'
National senior unsecured rating affirmed at 'AA-(idn)'
IDR4trn bond programme affirmed at 'AA-(idn)'
IDR740bn tranche I under the IDR4trn bond programme affirmed at 'AA-(idn)'