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Fitch Affirms Indonesia's XL's National Rating with Stable Outlook

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Fitch Ratings has today affirmed PT XL Axiata's (XL) National Long term Rating at 'AA (idn)'. The Outlook is Stable. At the same time, Fitch has affirmed XL's IDR1.5trn senior unsecured notes at 'AA (idn)'. The agency also rates XL's foreign and local currency Issuer Default Ratings at 'BB' with a Stable Outlook.

XL's ratings reflect its entrenched third position in Indonesia's cellular market, reasonable growth prospects, and strategic importance to its Malaysian parent, Axiata Group Berhad (86.5%), as its largest overseas investment. XL was able to maintain its market position through most of financial year 2009 (FY09), and closed its subscriber market share gap with the second-largest player, PT Indosat.

During FY09, XL reported 5.4 million net subscriber additions, increasing its total subscriber base to 31.4 million - this underpinned moderate net revenue growth of 13.6% yoy and a stronger EBITDAR margin at 45% of revenues (FY08: 42.3%). Robust cash flow generation and lower capex of IDR5.3trn resulted in XL reporting positive free cash flow (FCF) of IDR1.1trn in FY09. Coupled with IDR2.8trn in proceeds from its right issue in December 2009, XL reduced its total debt outstanding to IDR13.5trn at FYE09 (FYE08: IDR18.7trn). Consequently, XL's key financial measures improved significantly during the same period - with net adjusted leverage declining to 2.1x from 3.3x, and funds from operations (FFO) by gross interest expense rising to 6.2x from 4.1x.

With XL's capex programme between USD400-USD450m during FY10 and dividend guidance of 20% of normalised net income (net income adjusted for unrealised forex gain or losses), XL is expected to remain FCF positive in FY10. However, Fitch believes XL's FCF and cash balance of IDR0.75trn at end-2009 will not be enough to repay short-term maturities of IDR2.5trn; the funding gap is expected to be met with additional debt. However, it is unlikely to increased total indebtedness and, accordingly leverage is expected to remain broadly stable during FY10.

Fitch has incorporated a one-notch uplift from XL's standalone rating, in accordance with its Parent and Subsidiary Rating Linkages Methodology, to reflect the company's strategic important to its parent, representing 32% and 33% of group revenue and EBITDA, respectively, as at FY09. Axiata's participation in XL's rights issue in December 2009, and its commitment to act as standby buyer in the issue provides evidence of support. Fitch also notes that XL changed its official name to include "Axiata" from PT Excelcomindo Pratama Tbk, subsequent to the completion of the rights issue.

The ratings are constrained by persistent regulatory uncertainty, limited FCF generation due to high capital expenditure levels, as well as the risks inherent in Indonesia (such as political, social, economic factors, currency instability and the lack of an effective legal framework).

The Stable Outlook is based on Fitch's expectation that XL will continue to solidify its market position and that its credit metrics will remain consistent with the rating level through FY10.

However, the agency notes that downward pressure on the standalone ratings could occur if debt-funded capex and/or shareholder returns are more aggressive than anticipated, or in the event of a material deterioration in the operating environment (such as irrational price competition or unfavourable regulatory developments), which leads to net adjusted leverage exceeding 4x on a sustained basis. Positive ratings triggers include a notable improvement in XL's capital structure and operating environment, and continued positive FCF generation leading to net adjusted debt below 2x on a sustained basis. In relation to the one-notch rating support from its parent, a substantial reduction of Axiata Group Berhad's ownership in XL could eliminate the rating uplift attached to the final ratings.

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