JAKARTA (TheInsiderStories) – Moody’s Investors Service has upgraded the Corporate Family Rating (CFR) of MNC Investama Tbk. (P.T.) (BHIT) to B3 from Caa3. At the same time, Moody’s has assigned a definitive Caa1
rating to BHIT’s USD231 million 9% senior secured notes due 11 May 2021.
The outlook is negative.
The rating action follows the completion of the exchange offer launched
on 17 April 2018 — with respect to the USD365 million 5.875% senior
secured notes of Ottawa Holdings Pte. Ltd (Ottawa), a wholly owned BHIT
subsidiary — of up to USD250 million for new senior secured notes due
2021 and a cash tender payment.
The company announced that USD186 million of notes had been exchanged, or around 74% of the USD250 million offered. Bondholders holding around
USD64 million have not consented to the exchange.
In conjunction with the exchange completion, BHIT and the holder of an
aggregate USD115 million of the existing 2018 senior secured notes have
agreed initially on a conversion into subordinated debt, which will remain deeply subordinated and be non-interest bearing.
BHIT will then issue new shares to the converting holder on or before 30
As a result, in aggregate, the company will issue USD231 million senior secured notes which – together with the USD115 million subordinated debt
and cash – will be used to redeem the maturing $365 million senior
secured notes issued by Ottawa.
Moody’s has assessed the transaction as comprising a distressed exchange
and a default due to the extension of the maturity date beyond its initial terms as well as the conversion of a portion of the notes into subordinated debt and ultimately equity. Moody’s definition of default is intended to capture events whereby issuers fail to meet the debt service obligations outlined in their original debt agreements.
“The upgrade of BHIT’s rating to B3 reflects the successful completion of
the exchange transaction such that the 2018 notes will be fully repaid and reflects the improved debt maturity profile of the company on a standalone basis,” says Annalisa DiChiara, a Moody’s Vice President and Senior Credit Officer.
However, although, the transaction extends BHIT’s debt maturity profile
to 2021 on a standalone basis, its liquidity position will remain fragile, reflecting its reliance on dividends from subsidiaries – primarily PT Media Nusantara Citra Tbk (MNCN) – to satisfy its cash obligations, including interest expenses on the proposed notes and operating costs.
MNCN is Indonesia’s leading free-to-air broadcast company and contributes
around 52% and 75% of the BHIT’s consolidated revenues and EBITDA,
respectively. MNCN’s defensible market position and stable cash flow provide an anchor for BHIT’s credit profile as it is also the primary source of dividend income for BHIT.
“That said, concerns around BHIT’s capital structure — including its high leverage and ability to meet its debt service obligations — remain. We expect liquidity at the holding company level to remain weak, with little cash buildup because we expect dividends received from subsidiaries to just meet interest expense over the next 12-24 months,” adds DiChiara, also Moody’s lead analyst for BHIT.
However, the company will fund a debt service reserve account – equal to
one semi-annual interest payment – from the proceeds of the 2021 notes.
In addition, BHIT’s subsidiaries have large amortization payments or debt
maturities, or both, over the next one to two years raising refinancing risks and pressuring cash flow generation which may ultimately their ability to upstream dividends to BHIT.
As a result, BHIT will rely on inorganic measures, namely planned asset
sales and the monetization of stakes in subsidiaries, to support its standalone liquidity, and provide cash to ultimately repay the new notes in 2021.
BHIT’s organizational and legal structure is also complex and raises concerns regarding transparency with respect to shareholder intentions and corporate governance, which is also taken into account in the rating.
The Caa1 rating on the senior secured notes reflects the company’s complex organizational and legal structure, and thus factors in structural subordination. As a holding company, BHIT is entirely reliant on dividends. The claims of BHIT’s creditors on the assets and cash flows of its operating units are subordinate to those of the direct creditors of the operating units, as the majority of the group’s debt is incurred at the operating unit level with dividends being up streamed from key operating assets for servicing its obligations.
The outlook is negative, reflecting the BHIT’s weak liquidity position, given its holding company position and reliance on dividends. It also considers BHIT’s high leverage – as measured by debt/EBITDA on a consolidated basis — of over 5x .
Moreover, amortization payment requirements and refinancing risks at
subsidiaries level may ultimately limit their ability or willingness to upstream dividends to BHIT, further impairing its already weak interest coverage and liquidity position.
To that end, should the coverage of cash dividends received from its operating companies to interest expenses at the holding company level
fall below 1.0x, the ratings will be downgraded.
An inability to execute the planned asset sale within 12 months would
result in a rating downgrade. Finally, if the subsidiaries are unable to address debt maturities in a timely manner — including Sky Vision’s bank loan maturing in November 2019 – will also result in a rating downgrade.
Given the negative outlook, an upgrade is unlikely. However the ratings
outlook could return to stable if the company executed on asset sales such that liquidity at the holding company improves materially. In addition, we would look for BHIT to sustain dividends/interest coverage of at least 2.0x on a standalone basis as well as establish a track record of executing its refinancing requirements at the operating company level on a timely basis.
Headquartered in Jakarta, MNC Investama Tbk. (P.T.) (BHIT) is a listed
investment holding company with core holdings in operating companies
primarily in the Indonesian media and financial services sectors.
Through its 52.85% stake in PT Global Mediacom Tbk (BMTR), BHIT has a
62.84% stake in PT Media Nusantara Citra Tbk (MNCN), Indonesia’s leading
free-to-air broadcast company, and a 92.41% stake in PT MNC Sky Vision
Tbk, Indonesia’s leading pay-TV operator. BHIT also owns a 69.88% stake
in PT MNC Kapital Indonesia Tbk (MKAP), a leading financial services
company in Indonesia.