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Firm Affirms Tower Bersama at 'BB-'/'AA-(idn)'; Outlook Stable
May 9, 2017 / 6:52 AM / 7 months ago

Firm Affirms Tower Bersama at 'BB-'/'AA-(idn)'; Outlook Stable

(The following statement was released by the rating agency) SINGAPORE/JAKARTA, May 09 (Fitch) Fitch Ratings has affirmed the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) of Indonesian telecommunications tower company PT Tower Bersama Infrastructure Tbk (TBI) at 'BB-'. Simultaneously, Fitch Ratings Indonesia has affirmed the National Long-Term Rating and national senior unsecured rating at 'AA-(idn)'. The Outlook on the IDRs is Stable. A full list of rating action follows at the end of this commentary. '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 High Leverage: Fitch expects TBI's FFO-adjusted net leverage to remain elevated at around 6.0x through the next three years (2016: 6.3x) due to continued weakness in free cash flow (FCF) generation from an aggressive shareholder return policy as well as high finance costs and capex needs. The company plans to operate at leverage below 5.5x, measured by gross debt/last quarter annualised EBITDA (end-2016: 5.1x); this is within the parameters of its bond covenants of 6.25x. Our forecast assumes 2017 EBITDA of around IDR3.5 trillion (2016: IDR3.2 trillion); which is insufficient to fund yearly dividends, share buybacks, annual interest payments of IDR1.7 trillion and capex of IDR1.7 trillion- IDR1.9 trillion. High-Single Digit Growth: We forecast TBI's revenue to increase by high-single digits in 2017 and 2018 (2016: 8.5%), driven by its long-term evolution network rollout amid the proliferation of data services 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, at 41% of revenue, compared with PT Profesional Telekomunikasi Indonesia's (Protelindo, BBB-/AAA(idn)/Stable) 19% and PT Solusi Tunas Pratama Tbk's (STP, BB-/A+(idn)/Stable) 14%. Stable Margin, Tower Rentals: Fitch expects stable operating EBITDA margins in 2017 (2016: 86.8%), as tower rentals are locked-in under existing lease contracts. The company's average remaining contract period is around six years, with no major contracts due for renewal in the next two years. Nevertheless, average monthly tower leases may come under pressure as tenancy contracts expire, the bulk of which will take place after 2020. TBI's locked-in revenue was IDR23 trillion as at end-2016. Counterparty and Forex Risk: TBI's rating also reflects low counterparty risk. Revenue contribution from Indonesian telco operators with investment-grade international ratings was 83% in 2016; higher than Protelindo's 48% and STP's 64%. 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+/AAA(idn)/Stable). Receivables from PT Internux increased to IDR125 billion (3% of revenue) at end-2016, although we expect any possible discontinuation of lease payments by the tenant is limited to 2% of TBI's revenue. Limited Structural Subordination: TBI's bonds are rated at the same level as its Long-Term IDR, despite their structural subordination to debt held at the operating subsidiaries, which generate all of the group's revenue. We expect the ratio of prior-ranking debt/EBITDA to fall to around 2.5x by 2019 from 2.9x at December 2016. 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, underpinning our decision not to notch the bonds down from the IDR. DERIVATION SUMMARY TBI's ratings reflect the favourable business profile of tower companies that justifies higher leverage metrics than for most corporate credits. Its cash flow stability and predictability are backed by long-term lease contracts with Indonesian mobile operators. The ratings also benefit from TBI's lower customer concentration risk and stronger organic growth 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 above 6.0x is high compared to Protelindo's 2.0x and STP's 5.5x. Its National Long-Term Rating is one notch above STP's 'A+(idn)' due to TBI's larger scale, stronger organic growth and better tenancy mix, which we believe more than offsets the higher net leverage to justify one notch higher on the National scale. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue to grow at around high-single-digit rates in 2017 and 2018. - Yearly additions of 1,200-1,300 towers and 1,900-2,300 tenants in 2017-2019. - Discontinuation of lease payments and no recovery of receivables from Internux to remove around 2% of TBI's annual revenue. - Operating EBITDA margin in the mid-80% range in 2017-2019. - Capex/revenue ratio of 35%-50% in 2017-2019 (2016: 36.8%). - Dividend payments and share buybacks of IDR1.0 trillion-1.5 trillion per annum. - Gross debt/operating EBITDA of below 6.0x. - No acquisitions or divestments. - Average interest cost at around 9.7%. RATING SENSITIVITIES Developments that may, individually or collectively, lead to positive rating action include: -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 a solid path to return to FFO-adjusted net leverage (based on the hedged debt amount) of below 5.5x on a sustained basis. 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 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 in April 2018 and USD350 million 5.25% senior unsecured notes maturing in February 2022 issued by its 100%-owned operating company, TBG Global Pte Ltd. TBI called its USD300 million bonds for settlement on 25 May 2017, which will be refinanced using existing committed bank facilities. In addition, management is seeking shareholder approval to issue up to USD500 million in bonds; a yearly approval it had also obtained in May 2016. TBI had an unrestricted cash balance of IDR365 billion at end-2016. Following the extension of its USD300 million revolving credit facility to June 2022, TBI had no short-term debt maturities due in 2017. The company had a total of USD420 million in undrawn revolving loan facilities as of end-March 2017. FULL LIST OF RATING ACTIONS PT Tower Bersama Infrastructure Tbk - Long-Term Foreign-Currency IDR affirmed at 'BB-'; Outlook Stable - Long-Term Local-Currency IDR affirmed at 'BB-'; Outlook Stable - National Long-Term Rating affirmed at 'AA-(idn)'; Outlook Stable - National senior unsecured rating affirmed at 'AA-(idn)' - Foreign-currency senior unsecured rating affirmed at 'BB-' - IDR5 trillion bond programme and issues under the programme affirmed at 'AA-(idn)' TBG Global Pte Ltd (subsidiary) - USD300 million guaranteed senior unsecured notes due 2018 affirmed at 'BB-' - USD350 million guaranteed senior unsecured notes due 2022 affirmed at 'BB-' Contact: Primary Analyst Janice Chong (International ratings) Director +65 6796 7241 Fitch Ratings Singapore Pte Ltd. One Raffles Quay South Tower #22-11 Singapore 048583 Salman Fajari Alamsyah (National ratings) Analyst +62 21 2988 6818 Fitch Ratings Indonesia DBS Bank Tower 24th Floor, Suite 2403 Jl. Prof. Dr. Satrio Kav 35 Jakarta 12910 Secondary Analyst (International ratings) Nitin Soni Director +65 6796 7235 Committee Chairperson Steve Durose Managing Director +61 2 8256 0307 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. 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