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Fitch Assigns 'AAA(idn)' Rating to XL's Sukuk Issue
April 6, 2017 / 3:24 AM / in 8 months

Fitch Assigns 'AAA(idn)' Rating to XL's Sukuk Issue

(The following statement was released by the rating agency) JAKARTA/SINGAPORE, April 05 (Fitch) PT Fitch Ratings Indonesia has assigned a National Long-Term Rating of 'AAA(idn)' on PT XL Axiata Tbk's (XL; BBB/AAA(idn)/Stable) IDR2.18 trillion sukuk ijarah (sukuk) issues. The issues are the second phase of XL's IDR5 trillion sukuk ijarah programme - affirmed at 'AAA(idn)' on 12 January 2017 - and are consequently rated at the same level as the programme. XL will use the issue proceeds to refinance its existing borrowings and for working-capital purposes. The sukuk rating is at the same level as XL's National Long-Term Rating of 'AAA(idn)', given the sukuk's structure. This reflects Fitch's view that default of these unsecured obligations would reflect default of the entity in accordance with Fitch's rating definitions. The rating also takes into account the sukuk's structure and documentation, which includes the following features: - XL's obligations under the documentation rank pari passu with its other unsecured obligations; - XL's commitment to irrevocably purchase the assets on maturity or the declaration of event of default by the trustee; - The price payable is the aggregate of the outstanding face amount of the sukuk plus any accrued and unpaid periodic distribution amounts; - On any periodic distribution date, XL 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 XL. The transaction will be governed by Indonesian law. Fitch does not express an opinion on whether the relevant transaction documents are enforceable under the Indonesian law. However, Fitch considers XL's intentions to support its sukuk obligations. Fitch's rating for the certificates reflects the agency's belief that XL would stand behind its obligations. Furthermore, by assigning ratings to the programme and certificates to be issued under it, Fitch does not express an opinion on the programme structure's compliance with sharia principles. 'AAA' 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 Deleveraging to 2.5x: Fitch expects XL's FFO-adjusted net leverage to improve to around 2.5x in 2017 and 2018 (2016: 3.0x), underpinned by gradual recovery in its mobile business and lower interest payments. XL's debt including lease liabilities had declined to IDR18.4 trillion by end-2016 (2015: IDR29.4 trillion) following a meaningful debt reduction through a rights issue in June 2016. In addition, its US dollar debt exposure had fallen to 32% (end-2015: 48%); XL's only US dollar borrowings now comprise bank loans amounting to USD350m which have been hedged to maturity, reducing the exposure to any adverse forex fluctuations. Gradual Recovery: Our forecasts assume a slow recovery in revenue as the company refines its strategy to regain revenue share and drive meaningful EBITDA growth. We forecast low- to mid-single-digit revenue growth and an operating EBITDA margin of around 37% (2016: 37.8%) for 2017 and 2018. Operating EBITDA is likely to be stagnant at around IDR8 trillion, as higher tower leases and marketing expenses offset growth in data revenue. XL plans to improve data monetisation as early as 1Q17, and to grow faster than the industry by 3Q17. Competition to Stabilise: The industry's growing focus on improving data yields should help stabilise competition and gradually increase data monetisation. The second-largest Indonesian telco, PT Indosat Tbk (BBB+/Stable), has indicated plans to reduce bonus data allowances starting end-2016, which we feel is a positive move to drive more rational pricing and ease pressure on margins. FCF Deficit: XL's cash flow from operations in 2017 may not be sufficient to meet a higher annual capex budget of close to IDR7 trillion (2016: IDR6 trillion), given the company's emphasis on network improvements intended to reinforce its leadership strategy in data. Capex expansion will mainly focus on 4G expansion and to narrow the network coverage and quality gap between XL and market leader PT Telekomunikasi Selular (Telkomsel, AAA(idn)) outside of Java. We assume no dividend payout in 2017 and 2018. DERIVATION SUMMARY XL's ratings include implied support from its overseas parent, Axiata, and therefore its National-Long-Term Rating is rated at the highest level on the national scale. Fitch's Parent and Subsidiary Rating Linkage applies, as we use a top-down method in assessing XL with Axiata as a basis, reflecting XL's strategic and financial importance to its parent. XL is the largest contributor to Axiata's EBITDA and capex. XL is adequately positioned against its closest peer PT Indosat Tbk (BBB+/AAA(idn)/Stable), based on the scale of its mobile operations in Indonesia. However, the latter's financial profile is more conservative, given its lower 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: - Gradual recovery in revenue; to grow by the low- to mid-single-digits in 2017-2018; - Competition to stabilise as telcos gradually rationalise bonus data allowance to drive monetisation; - Operating EBITDA margin of around 37% in 2017-2018; - Average annual capex of around IDR7 trillion in 2017-2018; - No dividend payments until 2019; - No M&A or divestments; and - Average interest cost of around 9.5% per annum. 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 Axiata - A downgrade of Fitch's credit view of Axiata. LIQUIDITY Reliant on Refinancing: We expect XL to refinance a portion of its debt when its fall due in 2017. As of end-December 2016, its IDR1.4 trillion cash balance was insufficient to cover short-term debt maturities (including lease liabilities) of IDR4 trillion over the next 12 months. However, we believe XL has reasonable refinancing ability, with access to local banks and capital markets. XL had reduced its US dollar debt exposure over the past one year with proceeds from the rights issue, and debt refinancing with Indonesian rupiah-denominated sukuk issuance. Contact: Primary Analyst Rufina Tam Associate Director +62 21 2988 6813 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: 12 January 2017 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. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. . Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email:; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Criteria for Rating Sukuk (pub. 16 Aug 2016) here National Scale Ratings Criteria -- Effective Oct. 30, 2013 - March 7, 2017 (pub. 30 Oct 2013) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Solicitation Status here 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 <a href="">WWW.FITCHRATINGS.COM.. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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