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April 3 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed the Long-Term rating and the Foreign Currency Long-Term Rating Local Currency Issuer Default Rating (IDR) of PT Indosat Tbk (Indosat) at ‘BBB’. Fitch also has affirmed the National Long-Term rating perusahaandi ‘AAA (idn)'. Outlook is stable for IDR and National Long-Term rating. Fitch also has affirmed the Senior Unsecured Rating at ‘BBB’.
National ranking in the category of ‘AAA’ denotes the highest rank Fitch on national rating scale for Indonesia. this ranking provided to an issuer or debt securities with the expectation of default risk the lowest relative to other issuers or securities in Indonesia.
Factors Fueling Rating
Lower Rating Headroom: stand-alone credit profile of Indosat at ‘BB’ now has a rating lower headroom. Funds flow from operations (FFO)-adjusted net leverage of the company will still be around 2.4x-2.5x (2013: 2.5x) - 3.0x closer to the limit where Fitch will be paying particular attention to the action negative ranking. Intense competition in the data segment and the high capital expenditure requirements will prevent a significant decline in the level of debt and beyond the positive impact of the sale of 5% stake in PT Tower Bersama Infrastructure Tbk (BB / Stable) of IDR1.4 trillion (USD120 million) in 2014.
Lower Profitability: operating EBITDAR margin of Indosat in 2014 is likely to fall to 40% -42% (2013: 43%) in the midst of competition strong in the segment data and customer acquisition costs are higher because of segment voice stagnant. Fitch estimates that the gains from services data is a major proponent of revenue growth will remain much more lower than the more traditional segments of voice and text services due lack of scale and price-based competition from operators more small.
Dollar depreciation: Among the Indonesian telecommunications operators, Indosat is most exposed to currency depreciation as 47% of debt is payable in U.S. dollars, in which only 25% dihedging. The company also pay around USD40-45 million tower lease costs in U.S. dollars EBITDA cause further exposure to currency risk. in 2013, Indosat adds IDR2.8 trillion of debt or leverage of approximately 0.3x due to the weakening of the rupiah. Fitch expects that the company will replace a portion of its debt in U.S. dollars with debt in dollars in 2014.
Negative FCF in 2014: FCF of Indosat in 2014 is expected to be negative (2013 FCF margin: -5%) due to the stagnant FFO will not be enough to finance the capital expenditures required to support data services growing rapidly. Capital expenditure / income will be high around 33% -35% (2013: 40.5%) because the company will pursue a competitor in the development 3G service. At the end of December 2013, the company had 5,400 3G base stations, remote lower than the ownership of PT XL Axiata Tbk (XL, BBB / Stable) at 15,000 and PT Telekomunikasi Indonesia Tbk (Telkom, BBB-/Stabil) at 27,000.
However, Fitch believes that the strategy of Indosat to deploy 3G technology using spectrum in the 900MHz bandwidth 2 and 2100MHz will resulting in savings in capital expenditure compared to competitors most other uses 2100MHz. FCF of Indosat is expected to became positive in 2015 due to the cost of capital expenditures peaked in , 2013.
Industry Consolidation: Fitch estimates that the industry will consolidate or smaller telecom operators will raise the tariff for their business models are not sustainable. Operator Code Division Multiple Access (CDMA) including PT Bakrie Telecom (C) and Telecom Tbk PT Smartfren (CC (idn)) continued difficulty to increase market share and face the problems liquidity. Indosat and Telkom as the market leader is likely to CDMA segment stop them and reallocate the spectrum for use GSM. Support From Parent Company: Indosat final rating at ‘BBB’ 3 notches into account the increase of stand-alone credit profile at its ‘BB’ due to the strategic importance to its parent company - Ooredoo QSC (OOredoo, A + / Stable), which owns 65% of shares. Document debentures and Ooredoo bonds have cross-default clauses that include children Significant companies including Indosat. Indosat is one child company of Ooreedoo growing rapidly and contributing 25% and 26% of the consolidated revenues and EBITDA in 2013.
Fitch does not expect that the positive ranking of actions will occur due to the leverage of the company will remain high in the medium term.
Negative: future developments that may, individually or collective downgrade include:
- Weakening the relationship between Indosat and Ooredoo
- FFO-adjusted net leverage rises above 3.0x on an ongoing basis
Traveler also has affirmed the following instruments:
Indosat Palapa Co. BV USD650 million 7.375% bonds maturing in 2020, secured by Indosat, at ‘BBB’.
Indosat’s 8.625% IDR1.2 trillion bond maturing in 2019 at ‘AAA (idn)’
Indosat’s IDR1.5 trillion 8.875% bonds due in 2022 at ‘AAA (idn)’
Indosat’s 8.625% IDR300 billion Sukuk Ijarah Bonds maturing in 2019 at ‘AAA (idn)'