October 23, 2017 / 2:37 AM / a year ago

Fitch Assigns 'AAA(idn)' Ratings to Indosat Ooredoo's Bond, Sukuk

(The following statement was released by the rating agency) JAKARTA, October 22 (Fitch) Fitch Ratings Indonesia has assigned National Long-Term Ratings of 'AAA(idn)' to PT Indosat Tbk's (Indosat Ooredoo, BBB+/AAA(idn)/Stable) IDR2.72 trillion senior unsecured bonds and IDR700 billion sukuk ijarah issues. The issues are the second phase of Indosat Ooredoo's IDR9 trillion bond programme and IDR1 trillion sukuk ijarah programme - assigned at 'AAA(idn)' on 27 April 2017 - and are consequently rated at the same level as the programmes. Indosat Ooredoo will use around half of the proceeds to refinance its existing borrowings and the remainder to pay the license fee for radio frequency spectrum. The ratings on Indosat Ooredoo's bond and sukuk issuances are the same as Indosat Ooredoo's National Long-Term Rating of 'AAA(idn)' as the risk of default on 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 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 has committed to pay the stated periodic distribution and principle amounts in 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 there is no shortfall in the distribution payable. - Indosat Ooredoo is committed to guaranteeing the functioning condition of the multimedia interactive, data and internet (MIDI) services network and the underlying sukuk asset against a decline in the value of the transfer benefit and 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 Ooredoo'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. '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 Parental Support Drives Ratings: Indosat Ooredoo's ratings include implied support from its Qatar-based 65% parent, Ooredoo Q.S.P.C. (A/Negative). Ooredoo's bond and loan documents contain a cross-default clause covering significant subsidiaries, including Indosat Ooredoo; one of Ooredoo's largest subsidiaries, accounting for 25% of its 1H17 revenue and 28% of EBITDA. The 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 Rating scale. Strong Standalone Credit Profile: Indosat Ooredoo has a strong credit profile compared with most other Indonesian corporates, even before the assessment of implied support from its strong overseas parent, reflecting its size, established market position, operating EBITDAR margin of over 40% and 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. Positive Free Cash Flow: Our forecast cash flow from operations of around IDR9 trillion should be sufficient to cover cash capex, where management is planning to spend IDR6 trillion this year. We expect annual capex to stabilise at around IDR7 trillion-8 trillion in the next two years, driven by the rollout of its Long-Term Evolution (LTE) network and the expansion of mobile coverage outside of Java. Our capex projection excludes additional spectrum fees in the upcoming 2100MHz spectrum auction. In spite of a potential capex increase, we expect Indosat Ooredoo to balance capex needs to maintain its balance-sheet strength. The company intends to de-lever, with net debt/EBITDA falling to 1.5x from 1.7x in the medium-term. 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. Indosat Ooredoo's expansion into the lower average revenue per user ex-Java market may dilute margins further. Nevertheless, we expect the increasing focus on data monetisation to drive rational competition, despite targeted promotions in certain market segments. Royalty payments to Ooredoo will also begin in 2017, but we expect only a small effect on profitability. The brand licence provides access to Ooredoo's group-wide products and services, including regional marketing campaigns, events and sponsorship. Rupiah Depreciation Exposure: Indosat Ooredoo's proportion of US dollar-denominated debt fell to 5% in the year to end-June 2017 (end-2016: 12%), lowering its vulnerability to rupiah depreciation. Management is looking to refinance maturing dollar-denominated debt with rupiah borrowings, which should further lessen currency risk and earning volatility. The company had hedged 68% of its US-dollar exposure through foreign-exchange forward swaps as of end-June 2017. DERIVATION SUMMARY The ratings on Indosat Ooredoo's bond and sukuk programmes and the issuances from these programmes are aligned with its National Long-Term Rating. 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 the National Rating scale. We assess that the ties between the stronger parent and Indosat Ooredoo are moderate and therefore rate the subsidiary on a bottom-up basis under our Parent and Subsidiary Rating Criteria. Indosat Ooredoo 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 5%, 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 (2016: 9%). - 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, excluding additional spectrum fees from the upcoming 2100MHz spectrum auction. - Dividend payout at 50% of normalised net income. - 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 IDR6 trillion over the next 12 months, given its unrestricted cash balance of IDR2 trillion at end-June 2017. The company had another IDR4 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 IDR19 trillion comprises 88% fixed-rate borrowings and 5% 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. 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: 15 March 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. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 10 March 2017 to 7 August 2017 (pub. 10 Mar 2017) here Criteria for Rating Sukuk - Effective from 16 August 2016 to 14 August 2017 (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 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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