Fitch Assigns 'AAA(idn)' Ratings to Indosat Ooredoo's Bond, Sukuk
The issues are launched from Indosat Ooredoo's IDR9trn bond programme and IDR1trn sukuk ijarah programme - affirmed at 'AAA(idn)' on 15 March 2016 - and are consequently rated at the same level as the programmes. Indosat Ooredoo will use the issue proceeds to refinance its existing rupiah debt, and to fund capex and spectrum licence fees.
The sukuk rating is at the same level as Indosat Ooredoo'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 Ooredoo's obligations under the documentation rank pari passu with its other unsecured obligations;
Indosat Ooredoo'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 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 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 Ooredoo's intentions to support its sukuk obligations. Fitch's rating for the certificates reflects the agency's belief that Indosat Ooredoo 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
Ooredoo's Support Drives Ratings: Indosat Ooredoo's IDRs are underpinned by the strong legal and strategic linkages with Ooredoo. Ooredoo's bond and loan documents contain a cross-default clause covering significant subsidiaries, including Indosat Ooredoo. The Indonesian telco is one of Ooredoo's largest subsidiaries, accounting for 23% and 27% of Ooredoo's 1Q16 revenue and EBITDA, respectively. Its rebranding to "Indosat Ooredoo" underscores the reputational risk to the parent.
Standalone 'BB+': Indosat Ooredoo's standalone credit profile is based on its second-largest market position in Indonesia - with a 21% market share of mobile subscribers, operating EBITDAR margin of over 40%, and a moderate net leverage. We believe FFO-adjusted net leverage will improve to 2.0x-2.2x in 2016 and 2017 (2015: 3.1x), as capex/revenue comes down to 26%-27% (2015: 27.5%) following the completion of network modernisation.
Margin Dilution: Fitch expects the operating EBITDAR margin to narrow to around 42% (2015: 44.8%) due to the larger mix of revenue from lower-margin data services, and royalty fees payable to Ooredoo. Our earnings expectation reflects our view of continued price discipline amongst Indonesian telcos in 2016, with telcos focusing on offering bigger data bundles for long-term evolution (LTE) services rather than competing on price. We forecast revenue to grow in the mid-single digits, driven by mobile data revenue.
Exposure to Rupiah Depreciation: Indosat Ooredoo is vulnerable to depreciation in the rupiah, as 21% - or USD351m - of its IDR22.1trn debt excluding finance leases were US dollar-denominated as of end-March 2016. The proportion of US dollar-denominated debt has fallen from 57% at end-March 2015, and we see scope for further reduction should plans for a tower sale materialise. Indosat Ooredoo has hedged 91% of its US dollar exposure through foreign-currency forward swaps.
Refinancing Needs: Fitch expects Indosat Ooredoo to partially refinance its short-term maturities of IDR7.8trn, given its unrestricted cash balance of IDR2.6trn as of end-March 2016. The company has IDR3.5trn in undrawn credit facilities, and has previously demonstrated reasonable refinancing ability with access to capital markets and local banks amid the implied support from Ooredoo. The average tenor of the debt is 2.9 years.
Fitch's key assumptions within the rating case for Indosat Ooredoo include:
Revenue to grow by the mid-single-digits in 2016-2017;
Competition to stabilise as smaller telcos focus on profitability;
Operating EBITDAR margin of around 42% in 2016-2017;
Annual cash capex/revenue ratio to fall to 26%-27% in 2016 and 2017;
No major debt-funded M&A plans; and
Dividend payments to resume in 2017 at 50% payout on normalised net profit.
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 Ooredoo and Ooredoo;
FFO-adjusted net leverage rising above 3.0x on a sustained basis.