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Fitch Downgrades Tower Bersama to 'BB-'; Outlook Stable
December 1, 2016 / 7:05 AM / a year ago

Fitch Downgrades Tower Bersama to 'BB-'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, December 01 (Fitch) Fitch Ratings has downgraded Indonesian telecommunications tower company PT Tower Bersama Infrastructure Tbk's (TBI) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to 'BB-' from 'BB'. The agency has simultaneously affirmed TBI's National Long-Term Rating at 'AA-(idn)'. The Outlook on the issuer ratings is Stable. A full list of rating actions follows at the end of this commentary. The downgrade reflects our view of the continued weakness in free cash flow (FCF) generation due to an aggressive shareholder return policy in addition to high finance cost and capex needs. Fitch expects TBI's FFO-adjusted net leverage to remain elevated at around 5.8x through the next three years (2015: 6.0x). '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 Slow Deleveraging: Fitch expects TBI to fund its FCF deficit with debt over the next three years. The company had indicated plans to operate at leverage within the parameters of its bank covenants; ratio of gross debt/last quarter annualised EBITDA of less than 6.25x (2015: 5.3x). Our forecast assumes 2016 EBITDA of around IDR3.2trn, insufficient to fund dividends, in addition to annual interest payments (IDR1.7trn) and capex (IDR1.6trn). TBI plans to spend up to IDR1.0trn on dividends and share buybacks in 2016, and refreshed its share buyback program in October to repurchase shares up to a maximum of IDR1.5trn over the next 18 months. Organic Growth: We forecast TBI's revenue to grow at 7%-10% per annum, driven by the progressive rollout of 4G networks in Indonesia. 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 and PT Telekomunikasi Indonesia (BBB-/Stable), at 45% of revenue, compared with PT Profesional Telekomunikasi Indonesia's (Protelindo, BBB-/Stable) 20% and PT Solusi Tunas Pratama's (STP, BB-/Stable) 19%. Stable EBITDA Margin: Fitch expects TBI's operating EBITDA margins to be relatively stable in 2016 and 2017 (2015: 85%). Tower rentals are locked-in under existing lease contracts, although average monthly tower leases may come under pressure as tenancy contracts expire. The company's average remaining contract period is around six years, with no major contracts due for renewal in the next two years. TBI's locked-in revenue was IDR23.5trn as at end-June 2016. Counterparty and Forex Risks: TBI's rating also reflects its low customer concentration risk. The revenue contribution from Indonesian telco operators with investment-grade international ratings was 83% in 9M16; higher than that of Protelindo's 49% and STP's 65%. In addition, TBI mitigates currency risk by fully hedging its US dollar exposure. It also has US dollar-denominated annual revenue of USD40m from PT Indosat Tbk (BBB/Stable). Limited Structural Subordination: TBI's bonds are rated at the same level as its Long-Term IDR, despite their structural subordination to debt held at the operating subsidiaries, which generate all of the group's revenue. We expect TBI to gradually replace its debts at its operating companies with debt at the holding company. 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. KEY ASSUMPTIONS Fitch's key assumptions within the rating case include: - tower additions of around 1,000 and tenant additions of around 2,000 in 2016-2018; - stable operating EBITDA margin of around 82%-84% in 2016-2018; - annual capex of IDR1.3trn-1.6trn or capex/revenue ratio of 30%-45% in 2016-2018 (2015: IDR1.6trn; 47%); - dividend payment and share buybacks of IDR1.0trn in 2016 and 2017, increasing in 2018; - no acquisitions. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - A debt-funded acquisition, or 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. Positive: 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 solid path to return to FFO-adjusted net leverage (based on the hedged debt amount) of below 5.5x on a sustained basis. LIQUIDITY Adequate Liquidity: TBI's liquidity position is supported by its unrestricted cash balance of IDR405bn at end-September 2016 and a USD245m undrawn banking facility (maturing in June 2018), sufficient to meet short-term maturities of IDR190bn over the next 12 months. We expect TBI to refinance its debt when it falls due; a majority of which will mature after 2017, comprising USD300m 4.625% senior unsecured notes due April 2018 and USD350m 5.25% senior unsecured notes maturing in February 2022. FULL LIST OF RATING ACTIONS PT Tower Bersama Infrastructure Tbk - Long-Term Foreign-Currency IDR downgraded to 'BB-' from 'BB'; Outlook Stable - Long-Term Local-Currency IDR downgraded to 'BB-' from 'BB'; Outlook Stable - National Long-Term Rating affirmed at 'AA-(idn)'; Outlook Stable - National senior unsecured rating affirmed at 'AA-(idn)' - Foreign-currency senior unsecured rating downgraded to 'BB-' from 'BB' - IDR4trn bond programme and issues under the programme affirmed at 'AA-(idn)' - IDR5trn bond programme and issues under the programme affirmed at 'AA-(idn)' TBG Global Pte Ltd (subsidiary) - USD300m guaranteed senior unsecured notes due 2018 downgraded to 'BB-' from 'BB' - USD350m guaranteed senior unsecured notes due 2022 downgraded to 'BB-' from '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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