MARC AFFIRMS ITS AAID RATING ON INSTACOM SPV'S MMTN

Dec 13, 2011 -
MARC has affirmed the rating of Instacom SPV Sdn Bhd’s (ISPV) RM200 million Murabahah Medium Term Notes (MMTN) Programme at AAID. The outlook on the rating is stable. ISPV is a wholly-owned subsidiary of Instacom Engineering Sdn Bhd (IESB) set up to facilitate the issuance of the MMTN to finance the purchase of completed telecommunication towers (telco towers) constructed by IESB. The affirmed rating reflects the credit quality of the rental payment stream from the three main domestic telecommunication companies (telco companies), and contract proceeds from telco towers constructed on behalf of DiGi Telecommunications Sdn Bhd (DiGi), against which the repayment of the notes is secured. Additionally, noteholders are not exposed to construction and commingling risks; drawdowns under the note facility can only be made with respect to completed telco towers and all assigned revenues arising from tower rentals and construction are paid into trustee-controlled designated accounts.

Sarawak-based IESB was awarded a 3-year turnkey contract in 2005 by Desabina Industries Sdn Bhd (DISB), a Terengganu state-backed company (SBC), to construct telco towers in Terengganu under the Malaysian Communication and Multimedia Commission’s (MCMC) Time-2 (T2) programme. The contract ended in 2008 following the completion of the construction of 84 telco towers. The completed towers were leased for seven years under a licence agreement signed between Desabina and telco companies. Desabina has surrendered its rights to rental payments to ISPV for the repayment of the issued notes and, to a lesser extent, maintenance and upkeep of the towers. The lease rental amount is dependent on several factors: height of the towers, the number of telco companies sharing the towers and any variation orders for the towers. The strong financial profiles of the three main domestic mobile operators, Maxis Berhad, Celcom Axiata Berhad, and DiGi, continue to underpin the credit strength of the rental payment stream.

ISPV is also allowed to utilise the MMTN facility to finance telco tower construction contracts signed between IESB and other telco and SBCs. As of date, IESB has entered into a telco tower construction contract with DiGi under which lump sum payments are made upon the completion of the towers. A total of 883 towers have been constructed under this contract. The short-term nature of the financing required has minimised cash flow mismatch risk and provides some measure of predictability to ISPV’s cash flow stream.

In the current financial year, RM15 million of RM20 million notes due were redeemed. ISPV’s cash balance of RM19.6 million as at end-August 2011 is more than sufficient to meet its scheduled obligations under the programme for the next six months. Currently, total notes outstanding under the rated facility amount to RM56 million. Over the next 12 months, ISPV’s finance service cover ratio (FSCR) is expected to range between 1.26 times and 3.63 times, as compared to FY2010’s 2.93 times and the programme’s FSCR covenant of 1.25 times.

IESB is undertaking a corporate exercise with I-Power Berhad (I-Power), a Bursa Malaysia Ace Market-listed company involved in e-business software development and software integration services. Upon completion, IESB shareholders will have a 71% stake in I-Power. The transaction is not expected to have any impact on ISPV as it would remain a wholly-owned subsidiary of IESB. MARC has received confirmation from the issuer that the corporate exercise does not breach any covenants made by ISPV in the issuance of the MMTN.

The current stable outlook on the rating incorporates expectations of continued timely payments from existing towers.

Contacts:
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.