Tele-Flow Capital Sdn Bhd - 2007

MARC has affirmed the ratings of MARC-1 ID/AA ID to Tele-Flow Capital Sdn. Bhd.’s (Tele-Flow Capital) Senior Notes under its RM90.0 million MUNIF/IMTN Facility.  The ratings reflect the credit quality of a rental payment stream from creditworthy telecommunication companies (telcos) that is assessed to be MARC-1ID/AAID. The payment stream is backed by a licensing agreement that obligates the telcos to make monthly payments of agreed rent over a period of 10 years. Also factored in the ratings are structural features which ensure ring-fencing of rental payments from the telcos for the benefit of noteholders, the elimination of the noteholders’ exposure to construction risk, and Tele-Flow Capital’s relationship with Yiked Bina Sdn Bhd (YBSB) through its parent, Tele-Flow Corporation Sdn. Bhd’s (TCSB) 49% interest in YBSB. YBSB is the state backed company which has exclusive rights to construct and manage the telecommunication towers and structures in the state of Kedah.

Tele-Flow Capital (formerly known as Tele-Flow (Perak) Sdn. Bhd), a wholly-owned funding vehicle of TCSB, is issuing the notes to fund the construction of telecommunication towers or infrastructures (towers) undertaken by TCSB and the acquisition of completed towers in the state of Kedah. YBSB has assigned rental payments from the telcos to TCSB as consideration for the latter’s management services to the company.

The licensing agreement between YBSB and the telcos offers key support for the structured financing. Under the License Agreement with Celcom (Malaysia) Bhd (Celcom), Maxis Broadband Sdn Bhd (Maxis) and Digi Telecommunications Sdn Bhd (Digi) in April 2005 covering a period of ten years,  monthly rental payments are payable in accordance with an agreed license fee schedule by the telcos, which will use the towers on a sharing basis. Rental payments are dependent on the height of the tower, number of telcos sharing the tower and variation order for the tower (if any). This contractual arrangement provides a high degree of visibility to the cashflow stream that supports debt service cover under the notes.  

The drawdown of the MUNIF/IMTN is subject to the completion of construction of towers by TCSB, thus eliminating construction risk. As at 26th June 2007, RM35.0 million of the Senior Notes have been drawndown on 73 completed towers, all of which were built under the Licensing Agreement. The rental payments from the telcos (Maxis, Celcom and Digi), which form the source of principal and profit repayments for the MUNIF/IMTN are assigned by TCSB to Tele-Flow Capital. In addition, the transaction structure requires 60% of the monies from the collection account to be paid into the sinking fund account specifically earmarked for payment of principal and profits of the MUNIF/IMTN thus mitigating liquidity risk.

Operational risks are considered low in view of the minimal maintenance required of TCSB. However, the transaction is exposed to event risk as insurance procured on completed towers do not cover revenue generation loss in the event some of the towers are destroyed. Nevertheless, based on the forecasted cashflow, MARC expects the debt service cover to be relatively resilient with the ability to withstand a loss in revenue of up to 7.0% per annum from year 3 of the facility onwards. The forecasted cashflow is moderately strong, exhibiting some ability to withstand delays in rental payments, changes in variation orders and the number of telcos sharing the towers. The minimum FSCR is expected to be at least 1.0 time under the various stress scenarios. MARC notes that in the projections, all drawdowns under the facility are concluded in the first 3 years, as drawdowns beyond this period may result in there being insufficient time for the accumulation of rental payments to meet the redemption of the notes at maturity.