Instacom SPV Sdn Bhd - 2009

MARC has upgraded Instacom SPV Sdn Bhd’s (ISPV) RM200 million Murabahah Medium Term Notes (MMTN) programme rating to AAID from AA-ID. ISPV is a special purpose company incorporated to facilitate the issuance of the MMTN to finance the purchase of completed telecommunication towers and infrastructure from its holding company, Instacom Engineering Sdn Bhd (IESB), a sub-contractor of telecommunication infrastructure. The rating action reflects the alignment of the MMTN rating with MARC’s assessment of ISPV’s underlying obligors Maxis Communications Bhd, Celcom Malaysia Bhd, DiGi Telecommunications Sdn Bhd (DiGi). The outlook on the rating is stable.

The primary consideration supporting this rating action is ISPV’s reduced exposure to the risk of cash flow mismatch between the fixed monthly rental stream from the obligors and the amounts required for debt service on the rated facility. Debt service is currently paid from lease payments received from telecommunication companies (telcos) for the use of 86 telecommunication towers constructed by IESB under a three-year turnkey contract with Terengganu state-backed company Desabina Industries Sdn Bhd (DISB) and the lump sum non-deferred payments received from telcos for the construction of telecommunication towers. With no outstanding towers to be completed under the DISB contract, ISPV anticipates that any future drawdown on the programme would be for the short-dated financing of DiGi contracts for which cash flow mismatch risk is assessed to be minimal. MARC opines that the foregoing will increase the predictability of ISPV’s cash flow stream. The rating also takes into the strong structural features of the programme which ensures that all receivables are remitted into trustee controlled designated accounts. The outlook for the rating is stable.

ISPV’s parent, IESB was awarded a three-year turnkey contract for the construction of telecommunication towers by Desabina Industries Sdn Bhd (DISB) in April 2005. IESB has completed the construction and has handed over 86 towers. The completed towers have been leased for a seven-year period under a license agreement entered by DISB with the telcos, and for which ISVP will collect lease payments totalling RM90.5 million until April 2015.

Apart from the DISB contract, IESB has secured construction contracts from DiGi for which payments are received in lump sums upon completion and successful handover of the telecommunication towers to DiGi. As at August 31, 2009, a total of 786 towers under the DiGi contracts have been completed and handed over. MARC notes that these orders from DIGI have mitigated the loss of revenue from the early termination of IESB contract with DISB by six months, which resulted in fewer number of towers constructed.  

MARC notes that the ISPV’s cash balance of RM28.99 million as August 31, 2009 is sufficient to meet 2010 maturities of RM20 million. Debt service obligations on the MMTN are given priority in a payment waterfall.

As of date, a total of RM150 million has been drawn down on the programme, of which RM64 million has been paid, with only RM86 million outstanding. MARC understands that the company will draw RM10 million annually until 2014 and another RM5 million in 2015 to finance DiGi contracts. The Financial Service Cover Ratio (FSCR) over the remaining tenure of the programme is expected to range from a low of 2.48 times to a high of 7.37 times at each financial year end. The FSCR as at December 31, 2008 was 2.20 times, well above the covenanted minimum FSCR of 1.25 times. Rating stability is conditional upon transaction obligors maintaining their individual credit quality within the AA rating level.

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