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Fitch Assigns 'AAA(idn)' Ratings to Indosat's Bond, Sukuk Issues
November 16, 2015 / 1:00 AM / 2 years ago

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

(The following statement was released by the rating agency) JAKARTA/SINGAPORE, November 15 (Fitch) Fitch Ratings Indonesia has assigned National Long-Term Ratings of 'AAA(idn)' to PT Indosat Tbk's (Indosat; BBB/AAA(idn)/Stable) IDR794bn senior unsecured bonds and IDR106bn sukuk ijarah issues. The issues are from Indosat's IDR9trn bond programme and IDR1trn sukuk ijarah programme - affirmed at 'AAA(idn)' on 27 March 2015 - and are consequently rated at the same level as the programmes. Indosat will use the issue proceeds to refinance its existing US dollar debt, and to fund capex and spectrum licence annual fees. The sukuk rating is at the same level as Indosat'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: - Indosat's obligations under the documentation rank pari passu with its other unsecured obligations - Indosat'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, Indosat 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. 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 Indosat's intentions to support its sukuk obligations. Fitch's rating for the certificates reflects the agency's belief that Indosat 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 Parent's Support: Indosat's 'BBB' IDR incorporates a three-notch uplift from its standalone credit profile of 'BB' based on its strategic and financial linkages with its 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. Indosat is one of Ooredoo's largest and fastest-growing subsidiaries, accounting for about 20% of Ooredoo's group revenue and 21% of EBITDA in 9M15. Standalone 'BB': Indosat's standalone credit profile of 'BB' is based on its second-largest market position in Indonesia with a 20% revenue market share, operating EBITDAR margin of over 40% and a moderate 2014 funds flow from operations (FFO)-adjusted net leverage of 2.4x. Capex is likely to stabilise at around IDR7trn following the completion of its network modernisation in 2015. Lower Profitability: We believe that Indosat's 2015-2016 operating EBITDAR margin will decline towards 40% (2014: 42.5%) due to changing revenue mix as lower-margin data services substitute more profitable voice and text services. We estimated data's EBITDA margin is around 15%-20% - much lower than traditional voice and text's profitability of over 40%. Exposure to Rupiah Depreciation: Indosat is exposed to rupiah depreciation as 43% of its IDR26.9trn debt as at end-September 2015 is in US dollars, of which around 54% is hedged through forward contracts. It also pays about USD40m-45m in tower lease rentals denominated in US dollars, which further exposes its EBITDA to currency risk. However, management's strategy to gradually refinance its US dollar debt through rupiah debt will mitigate the forex risk over the medium term. Positive FCF: We forecast that Indosat will generate 2%-3% in FCF margin from 2015 as its cash flow from operations of IDR8trn will be sufficient to fund its capex of IDR7trn and dividends of around IDR200bn-300bn. The ratio of capex to revenue for 2015-2016 is likely to trend down to around 28%-30% (2014: 33%) given the completion of its network modernisation. Competition to Stabilise: We expect competition to stabilise as smaller and weaker telcos are now focusing on profitability rather than market share. The industry could further consolidate as smaller unprofitable telcos may seek M&A due to depressed data tariffs and the significant investment needed for Long-Term Evolution (LTE) roll-out. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for the issuer include: - Revenue to grow by low single-digit percentage in 2015 driven by data services. - Operating EBITDAR margin to decline towards 40% due to data-led substitution of more profitable voice and text services and depressed data tariffs. (Please refer to "2015 Outlook: Indonesian Telecommunications Services", dated 11 November 2014 for details on Fitch's view on the industry.) - Positive FCF margin of 2%-3% starting 2015 as capex/revenue trends down to 28%-30%. - Effective interest rate to increase to 8.5%-9% over the Fitch base case as Indosat replaces its lower-cost US dollar debt through rupiah debt. RATING SENSITIVITIES The programme, issuance and class ratings are at the highest level on the National Ratings scale and therefore cannot be upgraded. Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Any weakening of the links between Indosat and Ooredoo - FFO-adjusted net leverage rising above 3.0x on a sustained basis. LIQUIDITY Liquidity Hinges on Refinancing: Indosat's cash balance of IDR3.7trn as of end-September 2015 will be insufficient to meet its short-term maturities of around IDR4.3trn due over the next 12 months. However, we believe that Indosat has reasonable refinancing ability, with access to the capital markets and local banks amid the implied support from Ooredoo. At end-September 2015, the average debt maturity is comfortable at 3.1 years. Contact: Primary Analyst Olly Prayudi Associate Director +62 21 2988 6812 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: 26 March 2015 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: 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 Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Nati

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