Cellular Structures Sdn Bhd - 2008

MARC has affirmed the ratings of Cellular Structures Sdn. Bhd.’s (CSSB) RM184.0 million Senior MUNIF/IMTN (Senior Notes) and RM8.0 million Junior IMTN (Junior Notes) at MARC-1ID / AAID  and AID  respectively. The ratings reflect the credit strength of the telecommunication companies (telcos) which are contractually obligated to make fixed monthly rental payments for the towers over a period of ten years. The rating incorporates structural features which ring fences the rental payments from the telcos and eliminates construction risk. Notwithstanding CSSB’s holding company, Konsortium Jaringan Selangor Sdn. Bhd. (KJS) has the exclusive rights to construct and manage the towers in Selangor state. The rating of the Junior Notes reflects its subordination to the Senior Notes in respect of profit payment and principal repayment.

CSSB is a special purpose company incorporated solely for the purpose of issuing notes under the facility to fund the construction of towers and the acquisition of completed towers in Selangor; and collecting periodic rental payments from telcos as consideration for the use of the towers. KJS was appointed as the management services company for Selangor to undertake the construction of towers.

Under a License Agreement with Celcom (Malaysia) Bhd. (Celcom), Maxis Broadband Sdn. Bhd. (Maxis) and Digi Telecommunications Sdn. Bhd. (DiGi) in April 2005 and covering a period of ten years, monthly rental payments are payable in accordance with an agreed licence fee schedule by the telcos that takes into consideration 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 cash flow stability that supports required minimum finance service cover ratios under the facility. As the telcos provide the main source of repayment for the Notes, any significant deterioration in their credit profile may lead to a revision to the transaction’s ratings. However, since MARC’s last review of the ratings in July 2007, the payment performance of the telcos has been satisfactory.

The drawdown of the Senior Notes is subject to the completion of construction of towers by KJS, thus eliminating construction risk.  As at June 2008, the outstanding Senior Notes and Junior IMTN stood at RM30.0 million (FY2007: RM40.0 million) and RM5.0 million respectively backed by the completion and acquisition of 88 towers. The rental payments from the telcos which form the source of profit payment and principal redemption for the Senior and Junior Notes are assigned to CSSB. In addition, the transaction structure requires approximately 60% of the monies from the collection account to be paid into the sinking fund account specifically earmarked for payment of principal and profit of the Senior Notes and Junior Notes, thus mitigating liquidity risk. Operational risks are considered low in view of the minimal maintenance required on the towers. However, the transaction is exposed to event risk as insurance procured on completed towers does not cover revenue generation loss in the event some of the towers are destroyed.

Cash flow timing issues make it imperative that all drawdowns under the facility take place by June 2009 in order to allow sufficient time for the accumulation of rental payments to meet the redemption of the Senior Notes and Junior Notes at maturity. Based on the revised forecast cash flow which assumes all drawdowns to be completed by June 2009, the Finance Service Cover Ratio (FSCR) coverage is considered moderate with minimum FSCR (in line with the covenanted level of 1.5x), occurring in the final year of the transaction. Under the stress scenarios, the forecast cash flow is susceptible to a two-month delay in rental collection as well as to lower number of telcos sharing per tower, which would result in the minimum FSCR breaching the covenanted level in 2010 and 2011 respectively. However, the risk of slow payment from the telcos is low in view of their credit standing and good payment track record, while the risk of lower number of telcos sharing per tower is mitigated through continuing effort by CSSB to maximise tower sharing by telcos.

Strengths

• Rental payments stream from creditworthy telecommunication companies backed by a licensing agreement form payment source for rated notes;
• Exclusive rights awarded to holding company to construct and manage the telecommunication towers and structures (towers) in the state of Selangor; and
• Elimination of construction risk as drawdown of the notes is restricted only to completed towers.

Challenges

• Continued delays in the construction of towers arising from land acquisition issues and slower demand from telcos; and
• Potential shortfall in funds to meet redemption of notes at maturity should drawdowns occur after June 2009.