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06 May | Wednesday
Fitch Assigns 'AAA(idn)' Ratings to Indosat's Bond, Sukuk Issues ISAT.JK

(The following statement was released by the rating agency) JAKARTA/SYDNEY/SINGAPORE, May 05 (Fitch) Fitch Ratings Indonesia has assigned National Long-Term Ratings of 'AAA(idn)' to PT Indosat Tbk's (Indosat; BBB/AAA(idn)/Stable) IDR1.75trn senior unsecured bonds and IDR250bn 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 debt issue proceeds to refinance its existing US dollar debt and to fund capex. '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 stand-alone 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 22% of Ooredoo's group revenue, 25% of EBITDA and 25% of capex in 2014. Stand-alone 'BB': Indosat's stand-alone credit profile of 'BB' is based on its second-largest market position 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. We believe that Indosat will generate positive free cash flow (FCF) margin of 2%-3% during 2015-17 as capex will trend down once it completes its network modernisation by end-2015. Lower Profitability: We believe that Indosat's 2015-16 operating EBITDAR margin will deteriorate towards 40% (2014: 42.5%) mainly due to intense competition in the data segment and higher marketing costs. A decline in profitability is also due to a change in the 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 46% of its IDR25.5trn debt is in US dollars, of which around 56% 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. We estimate that a 15% further depreciation in IDR will add about 0.3x to Indosat's leverage. However, management's strategy to gradually refinance its US dollar debt through rupiah debt will mitigate the forex risk over the medium term. At end-September 2014, the average debt maturity is comfortable at 4.3 years. Positive FCF: We forecast that Indosat will generate at least 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 2015-16 will trend down to around 28%-30% (2014: 33%) as it completes its network modernisation. During 2014, Indosat tripled its 3G sites to 15,962 (2013: 5,409) and caught up with XL's 16,000 and drew closer to Telkom's 30,000 3G sites. We believe that Indosat's strategy to roll out 3G technology using two spectrum bandwidths of 900MHz and 2100MHz will bring capex savings relative to competitors, which are using mostly 2100MHz. Smaller Telcos to Exit: We believe that the industry will further consolidate in 2015 as intense data competition will force smaller, unprofitable telcos to consider exiting the market, reducing the industry participants to four from six, and bring more stability to data tariffs. During 2014, PT Smartfren Telecom Tbk (CCC(idn)) emerged as the sole code division multiple access (CDMA) operator as PT Telekomunikasi Indonesia Tbk's (BBB-/Stable) Flexi division and PT Bakrie Telecom Tbk closed their struggling CDMA operations. KEY ASSUMPTIONS Fitch's key assumptions within our 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 to 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 will trend 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. 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: Additional information is available on Applicable criteria, "Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage" dated 28 May 2014 and "National Scale Ratings Criteria", dated 30 October 2013, are available at Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage National Scale Ratings Criteria Additional Disclosure Solicitation Status ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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