Fitch Affirms Indonesia's Indosat Debt Ratings with Stable Outlook
Published on: 3rd Apr 2014
By: Ian Mansfield
Fitch Ratings has affirmed the debt ratings of Indonesia's Indosat with a stable outlook.
The debt ratings agency said that Indosat's standalone credit profile of 'BB' currently has low ratings headroom. Indosat's 2014-15 funds flow from operation (FFO)-adjusted net leverage will remain at around 2.4x-2.5x (2013: 2.5x) - closer to the 3.0x threshold above which Fitch may consider negative rating action. Intense competition in the data segment and high capex requirements would prevent meaningful deleveraging and more than offset the positive impact of a 5% stake sale in PT Tower Bersama Infrastructure USD120 million in 2014.
Indosat's 2014 operating EBITDAR margin is likely to decline to 40%-42% (2013: 43%) amid stiff competition in the data segment and higher subscriber acquisition cost as the voice market stagnates. Fitch believes that data services profitability, a key revenue growth driver, will remain much lower than that of traditional voice and text services due to lack of scale and price-based competition from smaller operators.
Among Indonesian telcos, Indosat is most exposed to currency depreciation as 47% of its debt is in US dollars, of which only 25% is hedged. It also pays about USD40m-45m in tower lease rentals denominated in US dollars, which further exposes its EBITDA to currency risk. During 2013, Indosat added IDR2.8trn of debt, or 0.3x on leverage, solely due to rupiah depreciation.
Fitch expects Indosat to replace part of its US dollar debt with rupiah debt in 2014.
Indosat's 2014 FCF is likely to be negative (2013 FCF margin: -5%) as stagnant FFO will fall short of capex needed to support fast-growing data services. Capex/revenue will run high - around 33%-35% (2013: 40.5%) - as the company catches up with competitors in expanding its 3G services. At end-December 2013, Indosat had 5,400 3G base stations, much lower than XL Axiata's 15,000 and Telekomunikasi Indonesian's 27,000.
However, Fitch added that it believes that Indosat's strategy to roll out 3G technology using two spectrum bandwidths of 900MHz and 2100MHz could bring capex savings relative to competitors, which are using mostly 2100MHz. Indosat's FCF is likely to turn positive in 2015 as capex peaked in 2013.
Fitch expects the industry to consolidate or smaller telcos to raise tariffs, given their unsustainable business models. CDMA operators, including Bakrie Telecom and Smartfren Telecom, continue to struggle to gain market share and face liquidity problems. Indosat and market leader Telkom would likely shut their CDMA segments and reallocate the spectrum for GSM use.
Support from Parent
Indosat's final 'BBB' rating continues to incorporates a three-notch uplift from its standalone credit profile of 'BB' due to its strategic importance to its parent - Ooredoo, which holds a 65% stake. Ooredoo's bond and loan documents contain a cross-default clause covering significant subsidiaries, including Indosat. Indosat is one of Ooredoo's fastest-growing subsidiaries and contributed 25% and 26% to its consolidated revenue and EBITDA respectively in 2013.