Bankruptcy Verdict Could Pressure Telkomsel's and Telkom Indonesia's Ratings but No Impact for Now
Moody's Investors Service says that the Central Jakarta District Court's decision to accept a bankruptcy petition against Telekomunikasi Selular (Telkomsel) could have negative implications for its Baa1 issuer rating and the Baa1 rating of its parent, PT Telekomunikasi Indonesia (Telkom Indonesia), although no rating action has been taken for now and the outlook remains stable.
Telkomsel has filed an appeal with the Supreme Court against the ruling; the appeal process typically takes 60 days, although it may be expedited. Should the Supreme Court uphold the decision, both ratings are likely to be lowered by multiple notches, reflecting the heightened risk from an uncertain legal environment in Indonesia. Telkomsel's fundamental credit profile, and particularly its liquidity position, remain strong.
On 14 September 2012, the Central Jakarta District Court accepted a bankruptcy petition filed by Prima Jaya Informatica against Telkomsel for non-payment of IDR5.3 billion (USD558,000). Prima Jaya Informatica had a two year contract with Telkomsel for distribution of prepaid cards and SIM cards, which resulted in the above disputed claim.
As part of the court proceedings, curators have been appointed to oversee Telkomsel's assets, and as per a court notice issued on 21 September 2012, creditors have until 12 October 2012 to file their claims against Telkomsel.
"The amount in question is small considering Telkomsel's cash of IDR4.3 trillion and total assets of IDR56.4 trillion as of June 2012. Nonetheless, the court process leaves Telkomsel exposed to claims -- either potential or already filed -- by other creditors and vendors," says Nidhi Dhruv, a Moody's Analyst.
"However, given Telkomsel's status as the leading cellular provider in Indonesia and its parentage -- 65% is held by state-owned Telkom Indonesia and 35% by Singapore Telecommunications Limited (Aa3 stable) -- our expectation is that its lender banks, being predominantly Indonesian institutions, will remain supportive," adds Dhruv, also Lead Analyst for Telkomsel and Telkom Indonesia.
Telkomsel continues to maintain a strong operating and financial profile with adjusted debt/EBITDA of 0.2x for the twelve months ended June 2012. Moody's expects Telkomsel's strong financial metrics and liquidity to provide it financial flexibility to meet its debt obligations despite the bankruptcy verdict.
Moody's said that it will continue to monitor the situation especially at various points in the process -- the main milestones being the Supreme Court verdict and the filing of creditor claims. In the event that there are substantial claims against Telkomsel, we believe that Telkomsel and Telkom Indonesia have sufficient funds to meet Telkomsel's debt obligations. Nonetheless, its impact on the company's liquidity position will have to be assessed.
Given Telkomsel is a significant subsidiary -- contributing 69% of Telkom Indonesia's consolidated revenue and 75% of consolidated reported EBITDA for the twelve months ended June 2012 -- we expect the parent company to be forthcoming in its support for Telkomsel. Moody's also notes that some of the bank loans at Telkomsel have cross-default provisions with Telkom Indonesia. Hence, any rating action on Telkomsel will also impact Telkom Indonesia's Baa1 rating.
In Indonesia, there have been precedents of the Supreme Court reversing the lower court bankruptcy verdicts. In the unlikely event that the Supreme Court upholds the lower court verdict, there is imminent downgrade pressure on the ratings for Telkomsel and Telkom Indonesia. Such an action would reflect both company's exposure to an uncertain legal framework in Indonesia as well as potential impact on their debt obligations.
Telkom Indonesia is the largest integrated telecommunications company in Indonesia. The company generated gross revenues of IDR73.6 trillion (US$8.2 billion) for the twelve months ended 30 June 2012. Telkom Indonesia is 53.80%-owned by the Government of Indonesia.
Telkomsel is the largest wireless telecommunications company in Indonesia. The company reported net operating revenues of approximately IDR51 trillion (US$5.5 billion) for the twelve months ended 30 June 2012.