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Fitch Assigns Indosat's Bond and Sukuk Programmes 'AAA(idn)' Rating
April 27, 2017 / 4:13 AM / 5 months ago

Fitch Assigns Indosat's Bond and Sukuk Programmes 'AAA(idn)' Rating

(The following statement was released by the rating agency) JAKARTA, April 27 (Fitch) Fitch Ratings Indonesia has assigned PT Indosat Tbk's (Indosat Ooredoo, BBB+/AAA(idn)/Stable) IDR9 trillion bond programme and IDR1 trillion sukuk ijarah programme National ratings of 'AAA(idn)'. The agency has also assigned National ratings of 'AAA(idn)' to the up to IDR2.7 trillion senior unsecured bonds and up to IDR300 billion sukuk ijarah issued under these programmes. The proceeds will be used for debt refinancing (67%), purchase of a base station sub-system (16%), and to pay the license fee for radio frequency spectrum (17%). 'AAA' Long-Term National Ratings denote the highest rating assigned by Fitch on its national rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country. KEY RATING DRIVERS Bond and Sukuk Programmes The ratings on Indosat Ooredoo's bond and sukuk programmes and the issuances from these programmes are the same as Indosat Ooredoo's National Long-Term Rating of 'AAA(idn)' as the risk of default of these senior unsecured obligations is aligned with that of Indosat Ooredoo in accordance with Fitch's rating definitions. For the sukuk programme and issuances, the ratings also take into account the sukuk's structure and documentation, which include the following features: - The sukuk will represent the company's unsecured obligations and will rank pari passu with all its other unsecured obligations. The sukuk has full recourse to the issuer and the payment obligations under the transaction documents will be direct, unconditional, and irrevocable. - On any periodic distribution date, Indosat Ooredoo's will pay the sukuk holders rental due under the lease agreement for the sukuk assets, which is intended to be sufficient to fund the periodic distribution amounts payable by Indosat Ooredoo. - The company's commitment to pay the periodic distribution amounts and the principle amount equal to the amount under the transaction document. If the revenue generated from the sukuk asset in any distribution period is less than the periodic distribution amount, the company can take measures to ensure that there is no shortfall in the distribution payable. - Indosat Ooredoo is committed to guarantee the functioning condition of the MIDI (multimedia interactive, data, and internet) services network, the benefit from which becomes the ijarah object; provide a guarantee against a decline in the value from the transfer benefit; and guarantee the availability of a substitute for the MDI services network. Failure to do so, if there is a material negative impact on the company's ability to fulfil its obligations, will constitute an event of default. The programme documentation contains a negative pledge provision, cross-default, as well as covenants, which are the same as those in Indosat's bond document. The sukuk transaction will be governed by Indonesian law. Fitch does not express an opinion on whether the relevant transaction documents are enforceable under Indonesian law, but considers Indosat Ooredoo's intentions to support its sukuk obligations. Fitch's rating on the sukuk reflects the agency's belief that Indosat Ooredoo will stand behind its obligations. When assigning ratings to the programme and issuance issued under the programme, Fitch does not express an opinion on the structure's compliance with sharia principles. Indosat Ooredoo Ooredoo's Support Drives Ratings: Indosat Ooredoo's ratings include implied support from its Qatar-based 65% parent, Ooredoo Q.S.C. (Ooredoo, A+/Stable). Ooredoo's bond and loan documents contain a cross-default clause covering significant subsidiaries, including Indosat Ooredoo, which is one of Ooredoo's largest subsidiaries, accounting for 25% of Ooredoo's 2016 revenue and 27% of its EBITDA. Its corporate-wide rebranding to "Indosat Ooredoo" since November 2015 underscores the reputational risk to the parent. Implied support from Ooredoo leads us to give Indosat Ooredoo the highest rating possible on the national scale. Standalone Profile: Even before assessment of implied support from its strong overseas parent, Indosat Ooredoo has a strong credit profile compared to most other Indonesian corporates, reflecting its size, established market position, with a 24% revenue market share, operating EBITDAR margin of over 40% and a moderate FFO-adjusted net leverage. Fitch expects the company to deleverage to around 2.0x in 2017-2019 through positive free cash flow generation of 3%-5% of revenue. Capex/revenue is likely to decline to 24%-25% over the next two years (2015: 28%), due to the completion of its network modernisation and Ooredoo's group procurement activities. The company intends to de-lever, with net debt/EBITDA falling from 1.7x to 1.5x in the medium-term. Positive Free Cash Flow: Our forecast cash flow from operations of around IDR9 trillion in 2017 should be sufficient to cover cash capex. We expect capex to stabilise at around IDR7 trillion-8 trillion, driven by the rollout of its Long-Term Evolution (LTE) network and the expansion of mobile coverage outside of Java. Our projections assume dividend payments will resume in 2018 at 50% of normalised net profit. Margin Dilution: Fitch sees the operating EBITDAR margin narrowing to 45%-47% in 2017 and 2018 due to the larger mix of revenue from lower-margin data services and competitive pressures. In addition, Indosat Ooredoo's expansion into the lower average revenue per user ex-Java market may dilute margins further. Nevertheless, the industry's increased focus on improving data sales yield by reducing data allowances should help stabilise competition and ease margin pressure. Royalty payments to Ooredoo will also begin in 2017, but we expect the impact on profitability to be relatively small. The brand licence provides access to Ooredoo's group-wide products and services, including regional marketing campaigns, events and sponsorships. Rupiah Depreciation Exposure: Indosat Ooredoo's proportion of US dollar-denominated debt had fallen to 12% at end-2016 (end-2015: 25%), lowering its vulnerability to depreciation in the rupiah. Management is looking to cut dollar-denominated debt to around 5% of on-balance sheet debt by end-2017, which should further lessen currency risk and earnings volatility. The company had hedged 66% of its US dollar exposure through foreign-exchange forward swaps at end-2016. DERIVATION SUMMARY The ratings on Indosat Ooredoo's bond and sukuk programmes and the issuances from these programmes are aligned with the National Long-Term Rating on the company. Indosat Ooredoo's ratings include implied support from its overseas parent, Ooredoo, and therefore its National Long-Term Rating is rated at the highest level on national scale. Under Fitch's Parent and Subsidiary Rating Criteria, we assess that the ties between the stronger parent and Indosat Ooredoo are moderate and therefore rate the subsidiary on a bottom-up basis. Indosat is well positioned against its closest peer PT XL Axiata Tbk (XL, BBB, AAA(idn)/Stable), based on the scale of its mobile operations in Indonesia. Indosat Ooredoo has a stronger balance sheet, with lower FFO-adjusted net leverage of around 2.0x and foreign-denominated debt exposure of 12%, compared with XL's 2.5x and 32%, respectively. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue to grow in the mid-single-digits in 2017-2019. - Competition to stabilise, as telcos rationalise bonus data allowance to drive monetisation. - Operating EBITDAR margin of around 45%-47% in 2017 and 2018, which includes onset payment of royalty fees to Ooredoo in 2017. The royalty fees are at 0.3%-1.0% of Indosat Ooredoo's operating revenue in 2017-2019. - Annual capex of IDR7 trillion - 8 trillion in 2017-2019. - Dividend payments to resume in 2018 with a dividend payout at 50%, the same level as previously. - No mergers, acquisitions or tower sales. RATING SENSITIVITIES The programme and issuance ratings are at the highest level on the National Ratings scale and therefore cannot be upgraded. Negative: Developments that may, individually or collectively, lead to negative rating action include: - Weakening of linkages with Ooredoo LIQUIDITY Reliant on Refinancing: Fitch expects Indosat Ooredoo to partially refinance its short-term maturities of close to IDR8 trillion in 2017, given its unrestricted cash balance of IDR2 trillion at end-2016. The company had another IDR2.0 trillion in undrawn credit facilities and had previously demonstrated reasonable refinancing, with access to capital markets and local banks amid implied support from Ooredoo. The total on-balance sheet debt of IDR20 trillion comprises 82% fixed-rate borrowings and 12% US dollar-denominated debt. A majority of its US dollar bank loans will mature this year and are likely to be refinanced by rupiah-denominated debt. Management plans to cut US dollar debt to 5% by end-2017. Contact: Primary Analyst Rufina Tam (National Ratings) Associate Director +62 21 2988 6813 Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 3-5 Jakarta 12910 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Date of Relevant Rating Committee: 15 March 2017 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Criteria for Rating Sukuk (pub. 16 Aug 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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