JAKARTA - Fitch Ratings Indonesia has assigned Indonesian telecommunications tower company PT Tower Bersama Infrastructure Tbk’s (TBI) Rp 5 trillion bond program a National Long-Term Rating of ‘AA-(idn)’. The agency has also assigned the up to Rp 1 trillion of bonds to be issued from the program a National Long-Term Rating of ‘AA-(idn)’.
TBI will use the proceeds from the proposed bonds to repay its existing US dollar 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
Proposed Bond Not Notched: Fitch rates the proposed bond at the same level as TBI’s National Long-Term Rating despite its structural subordination to debt held at the operating subsidiaries, which generate all of the group’s revenue. We expect TBI to gradually replace its debt at its operating companies with debt at the holding company. Furthermore, we believe that there will be strong creditor recovery in a distress scenario; a high proportion of the group’s operating cash flows are contractually locked in (Rp 23.7 trillion as of end-2015).
Low Ratings Headroom: Fitch expects fund flow from operations (FFO)-adjusted net leverage on a hedged debt basis to fall to around 5.5x in 2016 and 2017 (2015: 6.1x). Fitch is likely to take negative ratings action if these expectations are not met. TBI had indicated its plans to operate at a leverage within the parameters of its bond covenants, which is the ratio of hedged gross debt/EBITDA (last quarter annualized) of less than 6.25x (2015: 5.3x).
FCF Deficit: We believe the company’s free cash flow (FCF) will stay negative, as 2016 cash flow from operations of IDR1.5trn will not be sufficient to fully cover its capex budget of Rp 1.3 trillion-1.4 trillion and dividend commitments. TBI plans to spend up to Rp1 trillion on dividends and share buybacks this year, and expects this to increase in the future.
Counterparty and Forex Risks: TBI’s revenue has low counterparty risk as 83.5% comes from Indonesian telco operators with investment-grade international ratings. The counterparty risk is lower than that of its peers, PT Profesional Telekomunikasi Indonesia (BB+/Stable) and PT Solusi Tunas Pratama (BB-/Stable). In addition, TBI mitigates currency risks by hedging all of its US dollar exposure. It also has US dollar-denominated annual revenue of USD40m from PT Indosat Tbk (BBB/Stable).
Strong Funding Access: TBI’s cash balance of Rp 296 billion at end-2015 and US$280 million committed undrawn banking facility (maturing in 2018) will be sufficient to meet maturities of around Rp439 billion falling due over the next 12 months. In addition, TBI’s liquidity is supported by reasonable access to funding from banks and bond markets, both local and overseas.
Key Assumptions
Fitch’s key assumptions within the rating case include:
- Tower additions of less than 1,000 in 2016;
- Capex of IDR1.3trn-1.4trn in 2016 and 2017;
- Gradual recovery in tower and tenant growth from 2H16;
- Dividend payment and share buybacks of around IDR1trn in 2016 and 2017, and to increase in 2018;
- Stable industry rental tariff resulting in stable EBITDA margins of 84%-85% (2015: 85%); and
- No tower acquisitions.
Rating Sensitivities
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, or lease defaults by weaker telcos, or significant dividend payments and share buyback activity leading to fund flow from operations (FFO)-adjusted net leverage (taking into account the hedged debt amount) remaining above 5.5x on a sustained basis. (*)