December 1, 2016 / 7:10 AM / in a year

Fitch Affirms PT Solusi Tunas at 'BB-'/'A+(idn)'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, December 01 (Fitch) Fitch Ratings has affirmed Indonesia-based tower operator PT Solusi Tunas Pratama Tbk's (STP) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) of 'BB-', senior unsecured rating of 'BB-' and National Long-Term Rating of 'A+(idn)'. The Outlook on the issuer ratings is Stable. Fitch has also affirmed Pratama Agung Pte. Ltd.'s USD300m 6.25% guaranteed senior unsecured notes due 2020 at 'BB-'. The notes are unconditionally and irrevocably guaranteed by STP and are therefore rated at the same level as STP's Long-Term IDR. A full list of rating actions follows at the end of this commentary. 'A' National Ratings denote expectations of low default risk relative to other issuers or obligations in the same country. However, changes in circumstances or economic conditions may affect the capacity for timely repayment to a greater degree than is the case for financial commitments denoted by a higher rated category. KEY RATING DRIVERS Credit Profile Intact: STP's ratings reflect its long-term cash-flow visibility and moderate counterparty risk, with investment-grade telcos accounting for 65% of its revenue in 9M16. Fitch expects STP's credit profile to remain intact, although a possible discontinuation of lease payments by internet service provider PT Internux could remove around 5%-6% of its annual revenue. Receivables from Internux rose to IDR141bn (8% of revenue) at end-September 2016, with restructured payments scheduled to resume towards end-2016. The Stable Outlook reflects our expectations that STP's FFO-adjusted net leverage will be around 5.0x-5.3x in 2016-2018 (2015: 4.8x), below the 5.5x threshold at which we are likely to take a negative rating action. Limited Free Cash Flow: STP's free cash flow (FCF) generation is likely to be limited in 2016 and 2017 because of high interest cost and the possibility of a protracted delay in lease rentals from Internux. In addition, we expect slower tower growth in 2017 and 2018 in light of ongoing cost-cutting measures by its largest tenant, PT XL Axiata Tbk (BBB/Stable). Our forecast assumes STP adds 300-350 towers and around 600 tenancies yearly, which translates into IDR700bn-730bn in annual capex. Organic-Driven Growth: Fitch does not expect STP to undertake large debt-funded acquisitions given the low headroom on its incurrence covenant (net debt/last quarter annualised EBITDA of 5.5x) in its unsecured bond documents. STP's strategy to monetise its fibre optic backbone (2,600km as at end-September 2016) through long-term lease contracts could provide revenue growth and diversification. In 9M16, the tower business accounted for 90% of revenue and the fibre business 10%. Hedging In Place: Approximately 87% of STP's debt was US-dollar denominated as at end-September 2016. STP fully hedged the principal through currency swaps, mitigating its exposure to rupiah depreciation. Only 57% of the interest payment was hedged against forex risk, but this is partly offset by STP's USD3m of annual tower revenue from PT Hutchison Indonesia Tbk, which provides a natural hedge. Size, Leverage Drive Ratings: STP's ratings continue to be driven by its smaller size of under 7,000 towers and slower tower growth relative to Indonesia's top-two tower companies, PT Profesional Telekomunikasi Indonesia (BBB-/AAA(idn)/Stable) and PT Tower Bersama Infrastructure Tbk (BB-/AA-(idn)/Stable). Fitch expects STP's net leverage on a hedged basis to be much higher than Protelindo's net leverage of under 3.0x, but slightly lower than TBI's 5.8x. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: - Revenue to grow at around mid-single-digit rates in 2017 and 2018. - Yearly addition of 300-350 towers and around 600 tenancies. - Discontinuation of lease payments and no recovery of receivables from Internux. - Stable operating EBITDA margins of 83%-84%. - Capex/revenue ratio of 30%-40%. - Effective tax rate of 25%. - No dividend payments or acquisitions. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - FFO-adjusted net leverage lower than 4.0x on a sustained basis along with revenue contribution from investment-grade telcos remaining above 60%. Negative: Future developments that may, individually or collectively, lead to negative rating action include: - A debt-funded acquisition of another tower portfolio or lease defaults by weaker telcos leading to FFO-adjusted net leverage above 5.5x on a sustained basis. An increase in leverage could also result from larger-than-expected capex guidance that will reduce positive FCF. - A fall in revenue contribution from investment-grade telcos to below 50%. LIQUIDITY Adequate Liquidity: As at end-September 2016, STP had IDR289bn in unrestricted cash and no major debt due in the next 12 months. The company's liquidity is strengthened by its long-dated debt profile and IDR580bn in unutilised banking lines. The majority of STP's debt will fall due after 2018; this consists of the USD300m unsecured notes due on 24 February 2020 and a USD225m senior secured term loan due in December 2019 that it took in October 2016 to refinance its existing borrowings. FULL LIST OF RATING ACTIONS PT Solusi Tunas Pratama Tbk Long-Term Foreign-Currency IDR affirmed at 'BB-'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'BB-'; Outlook Stable National Long-Term Rating affirmed at 'A+(idn)'; Outlook Stable Senior unsecured rating affirmed at 'BB-' Pratama Agung Pte Ltd USD300m 6.25% guaranteed senior unsecured notes due 2020 affirmed at 'BB-'. Contact: Primary Analyst Janice Chong (International ratings) Director +65 6796 7241 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Salman Fajari Alamsyah (National ratings) Analyst Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 3-5 Jakarta 12940 Secondary Analyst Nitin Soni Director +65 6796 7235 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: 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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