Instacom SPV Sdn Bhd - 2007

The rating of Instacom SPV Sdn Bhd’s (Instacom SPV) RM200 million Murabahah Medium Term Notes (MMTN) has been reaffirmed at AA-ID. The rating outlook is stable. The re-affirmed rating reflects the credit quality of the rental payment stream from creditworthy telecommunications companies (telcos) for the use of telecommunications towers constructed by Instacom Engineering Sdn Bhd (Instacom Engineering). The payment stream is backed by a licensing agreement that obligates telcos to make monthly payment of agreed rent over a period of ten years. Also factored in the ratings are structured protections which ring fence the rental payments for the benefit of noteholders and eliminate the risk of non-completion of the towers.

Since MARC’s December 2006 review of Instacom SPV’s rating, the issuer has obtained approval from the Securities Commission to extend the tenure of its MMTN Programme by another three years to address the delayed issuance of work orders to Instacom Engineering. Whilst the original revenue projections had earlier assumed the completion of the towers by end of 2006, Instacom Engineering now anticipates completion by end of 2008. The extension of the MMTN Programme tenure as well as the recently incorporated restriction on the utilisation of the facility within three years from initial issuance will facilitate improved cash flow matching of rental payment stream with Instacom SPV’s obligations under the notes.

Instacom SPV is a single-purpose vehicle wholly owned by Instacom Engineering and created to facilitate the issuance of the MMTN. Instacom Engineering specialises in the erection of telecommunications towers, related civil works for tower sites, construction of telecommunications cabins and other related works.

The MMTN programme is a structured transaction involving the assignment of licence and/or rental payments from specific local telcos to Instacom SPV, in consideration for money (from proceeds of MMTN) paid to Instacom Engineering to fund the costs of construction of telecommunications towers and related infrastructure (telecommunications facilities).

The licensing agreement between Desabina Industries Sdn Bhd, the Terengganu-state backed company that is exclusively responsible for the construction of the state’s telecommunications infrastructure, offers key support for the structured financing. Under the Licence Agreement with Celcom (Malaysia) Bhd, Maxis Broadband Sdn Bhd and DiGi Telecommunication Sdn Bhd, the telcos, who are the users of the telecommunications facilities built by Instacom Engineering, will remit monthly rental payments directly to Instacom SPV. This contractual arrangement provides a high degree of visibility to the cash flow stream that supports debt service under the notes, taking into account the strong credit profiles of the telcos. To date, payments from the telcos have been prompt. Additionally, 15% of the amount due to Instacom Engineering is retained within Instacom SPV, providing further liquidity support. The drawdown of the MMTN is subject to the completion of the telecommunications facilities by Instacom Engineering, and certified acceptance by telcos including agreement on any variation order claims that may arise.

As at 9 October 2007, Instacom SPV was in compliance with the minimum required Finance Service Cover Ratio (FSCR) of 1.25 times (actual: 1.73 times). As at 30 September 2007, the balance of Instacom SPV’s Finance Service Reserve Account was RM18.3 million. Liquidity risk is mitigated by the priority accorded to debt service obligations in the issue’s payment waterfall while refinancing risk is moderated by the serial redemption of the facility.  A three-month debt service reserve acts as an additional buffer.