March 31, 2017 / 3:58 AM / 8 months ago

Fitch Assigns 'AA-(idn)' Rating to TBI's Bond

(The following statement was released by the rating agency) JAKARTA, March 30 (Fitch) PT Fitch Ratings Indonesia has assigned a National Long-Term Rating of 'AA-(idn)' to Indonesian telecommunications tower company PT Tower Bersama Infrastructure Tbk's (TBI, AA-(idn)/Stable) IDR700 billion senior unsecured bonds. The bonds are launched from TBI's IDR5 trillion bond programme - affirmed at 'AA-(idn)' on 1 December 2016 - and are consequently rated at the same level as the programme. TBI will use issue proceeds to refinance existing 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 Limited Structural Subordination: Fitch rates the proposed bond at the same level as TBI's National Long-Term Rating, despite their structural subordination to debt held at the operating subsidiaries, which generate all group revenue. We expect TBI to gradually replace its debt 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. Slow Deleveraging: Fitch expects TBI's FFO-adjusted net leverage to remain elevated at around 5.7x-6.0x through the next three years (2016: 6.3x), underpinned by continued weakness in the company's free cash flow (FCF) generation due to an aggressive shareholder return policy in addition to high finance costs and capex needs. The company plans to operate at leverage within the parameters of its bank covenants; gross debt/last quarter annualised EBITDA of less than 6.25x. Our forecast assumes 2017 EBITDA of around IDR3.4 trillion (2016: IDR3.2 trillion); insufficient to fund dividends as well as annual interest payments of IDR1.7 trillion and capex of IDR1.3 trillion-1.5 trillion. TBI refreshed its share buyback program in October 2016 to repurchase shares up to a maximum of IDR1.5 trillion over the next 18 months. Organic Growth: We forecast TBI's revenue to increase by 6%-9% per annum (2016: 8.5%), 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 Tbk (BBB-/Positive), at 40% of revenue, compared with PT Profesional Telekomunikasi Indonesia's (Protelindo, AAA(idn)/Stable) 20% and PT Solusi Tunas Pratama Tbk's (STP, A+(idn)/Stable) 19%. Stable EBITDA Margin: Fitch expects TBI's operating EBITDA margins to remain stable in 2017 (2016: 86.8%). 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 IDR22.6 trillion as at end-2016. Counterparty and Forex Risk: 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 2016; higher than Protelindo's (BBB-/Stable) 49% and STP's (BB-/Stable) 65%. In addition, TBI mitigates currency risk by fully hedging its US dollar exposure. It also has US dollar-denominated annual revenue of USD40 million from PT Indosat Tbk (BBB+/Stable). DERIVATION SUMMARY TBI's ratings reflect the favourable business profile of tower companies, which tend to have stable cash flows that justify higher leverage metrics than for most corporate credits. TBI's ratings benefit from its lower customer concentration risk against its closest peers - Indonesia's largest independent tower operator, Protelindo and third-largest independent tower company, STP. However, the ratings are constrained by TBI's weaker balance sheet due to its high leverage and aggressive shareholder return policy. TBI's FFO-adjusted net leverage of close to 6.0x is high against its closest peers, Protelindo's 3.0x and STP's 5.5x. Its National Long-Term Rating is one notch above STP's 'A+(idn)', underpinning TBI's larger scale, stronger organic growth and better tenancy mix, which we believe justifies the higher net leverage. Meanwhile, Protelindo 'BBB-/AAA(idn)' rating is based on its size and conservative financial profile, which mitigate counterparty risks from weaker telcos. Telcos with investment-grade international ratings account for close to half of Protelindo's revenue, compared to TBI's 83% and STP's 65%. 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 2017-2018; - stable operating EBITDA margin of around 82%-85% in 2017-2018; - annual capex of IDR1.3 trillion-1.5 trillion or capex/revenue ratio of 30%-40% in 2017-2018 (2016: IDR1.4 trillion; 37%); - dividend payment and share buybacks of IDR1.0 trillion-1.1trillion in 2017-2018; and - no acquisitions. RATING SENSITIVITIES Negative: Developments that may, individually or collectively, lead to negative rating action include: - a debt-funded acquisition, 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 long-term 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 Reliant on Refinancing: Fitch expects TBI to refinance its debt when it falls due; a majority of which will mature after 2017, comprising USD300 million 4.625% senior unsecured notes due April 2018 and USD350 million 5.25% senior unsecured notes maturing in February 2022. At end-2016, TBI had an unrestricted cash balance of IDR365 billion. As of 31 March 2017, the company has undrawn revolving loan facilities amounting to USD420 million and maturing in June 2022. Contact: Primary Analyst Salman Alamsyah Analyst PT Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 3-5 Jakarta 12940 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 Date of Relevant Rating Committee: 30 November 2016 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. 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