August 28, 2017 / 8:46 AM / 10 months ago

Fitch Assigns 'AA-(idn)' Rating to Tower Bersama's Bonds

(The following statement was released by the rating agency) JAKARTA, August 28 (Fitch) Fitch Ratings Indonesia has assigned a National Long-Term Rating of 'AA-(idn)' to Indonesian telecommunications tower company PT Tower Bersama Infrastructure Tbk's (TBI, AA-(idn)/Stable) IDR700 billion 8.4% senior unsecured bonds due in 2020. The bonds will be the third issuance launched from TBI's IDR5 trillion programme, affirmed at 'AA-(idn)' on 8 May 2017, and are rated at the same level as the programme. Assuming full subscription on the bond issuance, TBI will have around IDR3.4 trillion remaining on the programme, which expires on June 2018. The company states that it will use the issue proceeds to refinance existing debt. 'AA' National Ratings denote expectations of very low default risk relative to other issuers or obligations in the same country. The default risk inherent differs only slightly from that of the country's highest-rated issuers or obligations. KEY RATING DRIVERS Structural Subordination: TBI's bonds are rated at the same level as its Long-Term National Rating, despite their structural subordination to debt held at the operating subsidiaries - which generate all of the group's revenue. The ratio of prior-ranking debt/annualised EBITDA of 3.6x at end-June 2017 is high, but we expect the level of structural subordination to come down sufficiently for this ratio to fall to around 2.5x by 2019. Management has indicated it will tap in to various funding sources such as bank borrowings and longer-tenor US dollar bonds and Indonesian rupiah bonds. However, we expect TBI to pursue a medium-term strategy to gradually replace debt at its operating companies with debt at the holding company. We would consider notching down TBI's bonds if the level of structural subordination does not decline. TBI obtained shareholder approval in May 2017 for its 100%-owned operating company, TBG Global Pte Ltd, to issue up to USD500 million in bonds; this is an annual approval which had also been obtained in May 2016. Furthermore, we believe there will be strong creditor recovery in a distress scenario; a high proportion of the group's operating cash flows are contractually locked in, underpinning our decision not to notch the bonds down from the issuer ratings. High Leverage: Fitch expects FFO adjusted net leverage to remain high at around 6.0x through the next three years (2016: 6.3x), due to continued weakness in free cash flow (FCF) generation from an aggressive shareholder-return policy as well as high finance costs and capex needs. TBI plans to operate at leverage below 5.5x, measured by gross debt/last quarter annualised EBITDA (end-2016: 5.1x); which is within the parameters of its bond covenants of 6.25x. Our forecast assumes 2017 EBITDA of around IDR3.5 trillion (1H17: IDR1.7 trillion); insufficient to fund yearly dividends, share buybacks, annual interest payments of IDR1.7 trillion and capex of IDR1.7 trillion-1.9 trillion. LTE to Drive Growth: We expect rapid long-term evolution (LTE) network rollout amid the proliferation of data services in Indonesia to drive robust growth in TBI's revenue in 2017 and 2018. The management has revised its target for 2017 to add 2,700 tenants comprising 1,000 towers and 1,700 collocations. The company is likely to benefit from any accelerated capex expansion by its largest tower tenant, PT Telekomunikasi Selular (Telkomsel, AAA(idn)/Stable). TBI has a larger exposure to Telkomsel, at 41% of revenue, compared with PT Profesional Telekomunikasi Indonesia's (Protelindo, BBB-/AAA(idn)/Stable) 19% and PT Solusi Tunas Pratama Tbk's (STP, BB-/A+(idn)/Stable) 14%. Stable Margin, Tower Rentals: Fitch expects stable operating EBITDA margins in 2017 (1H17: 87%), as tower rentals are locked in under existing lease contracts. The company's average remaining contract period is around six years, with no major contracts due for renewal in the next two years. Nevertheless, average monthly tower leases may come under pressure as tenancy contracts expire, the bulk of which will take place after 2020. TBI's locked-in revenue was IDR23.5 trillion as of end-June 2017. Counterparty and Forex Risk: TBI's rating also reflects low counterparty risk. Revenue contribution from Indonesian telco operators with investment-grade international ratings was 83% in 2016; higher than Protelindo's 48% and STP's 64%. In addition, TBI mitigates currency risk by fully hedging its US dollar exposure. It also has US dollar-denominated annual revenue of USD40 million from PT Indosat Tbk (BBB+/AAA(idn)/Stable). Receivables from PT Internux had increased to IDR125 billion (3% of revenue) by end-2016, although we expect that any possible discontinuation of lease payments by the tenant is limited to 2% of TBI's revenue. DERIVATION SUMMARY TBI's ratings reflect the favourable business profile of tower companies, which tend to have stable cash flows that justify higher leverage metrics than for most corporate credits. TBI's ratings benefit from its lower customer concentration risk against its closest peers - Indonesia's largest independent tower operator, Protelindo and third-largest independent tower company, STP. However, the ratings are constrained by TBI's weaker balance sheet due to its high leverage and aggressive shareholder return policy. TBI's FFO adjusted net leverage of close to 6.0x is high against its closest peers, Protelindo's 3.0x and STP's 5.5x. Its National Long-Term Rating is one notch above STP's 'A+(idn)', underpinning TBI's larger scale, stronger organic growth and better tenancy mix, which we believe justifies the higher net leverage. Meanwhile, Protelindo 'AAA(idn)' rating is based on its size and conservative financial profile, which mitigate counterparty risks from weaker telcos. Telcos with investment-grade international ratings account for close to half of Protelindo's revenue, compared with TBI's 83% and STP's 65%. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue to grow at around the high-single-digit rates in 2017 and 2018. - Yearly additions of 1,200-1,300 towers and 1,900-2,300 tenants in 2017-2019. - Discontinuation of lease payments and no recovery of receivables from Internux to remove around 2% of TBI's annual revenue. - Operating EBITDA margin in the mid-80% range in 2017-2019. - Capex/revenue ratio of 35%-50% in 2017-2019 (2016: 36.8%). - Dividend payments and share buybacks of IDR1.0 trillion-1.5 trillion per annum. - Gross debt/operating EBITDA of below 6.0x. - No acquisitions or divestments. - Average interest cost at around 9.7% - TBI to gradually replace debt at its operating companies with debt at the holding company or TBG Global Pte Ltd. RATING SENSITIVITIES Developments that may, individually or collectively, lead to positive rating action include: - Fitch does not anticipate developments that would lead to a rating upgrade. However, we may take positive rating action if TBI appears to be on a solid path to return to FFO adjusted net leverage (based on the hedged debt amount) of below 5.5x on a sustained basis. Developments that may, individually or collectively, lead to negative rating action include: - Debt-funded acquisition, lease defaults by weaker telcos, or significant dividend payment and share buyback activity leading to FFO adjusted net leverage (based on the hedged debt amount) remaining above 6.5x on a sustained basis. LIQUIDITY Reliant on Refinancing: Fitch expects TBI to refinance its debt when it falls due; a majority of which will mature after 2017, comprising USD350 million 5.25% senior unsecured notes maturing in February 2022 issued by its 100%-owned operating company, TBG Global Pte Ltd. TBI called its USD300 million bonds for settlement on 25 May 2017, which it had refinanced using existing committed bank facilities. TBI had an unrestricted cash balance of IDR191 billion at end-June 2017. TBI had no short-term debt maturities due in 2017, following the extension of its USD300 million revolving credit facility to June 2022. The company had a total of USD143 million in undrawn revolving loan facilities as of end-June 2017. FULL LIST OF RATING ACTIONS PT Tower Bersama Infrastructure Tbk --Assign National Long-Term Rating of 'AA-(idn)' to TBI's IDR700 billion 8.4% senior unsecured bond due 2020 Contact: Primary Analyst Salman Alamsyah Analyst +62 21 2988 6818 Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 35 Jakarta 12910 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Date of Relevant Rating Committee: 8 May 2017 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Country-Specific Treatment of Recovery Ratings (pub. 18 Oct 2016) here Criteria for Rating Non-Financial Corporates - Effective from 10 March 2017 to 7 August 2017 (pub. 10 Mar 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers - Effective from 21 November 2016 to 16 June 2017 (pub. 21 Nov 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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