DHTI Capital Sdn Bhd - 2010

MARC has affirmed its ratings on special purpose company DHTI Capital Sdn Bhd’s (DHTI Capital) RM110 million Islamic Commercial Papers/Islamic Medium Term Notes (Senior Notes) and RM10 million Junior Islamic Medium Term Notes (Junior Notes) at MARC-1ID/AAID and A+ID respectively. The rating outlook is stable. The affirmed ratings reflect the credit quality of the rental payment stream from creditworthy telecommunication companies as the source of repayment of the notes. The payment stream is backed by a 10-year licence agreement between D’Harmoni Telco Infra Sdn Bhd (DHTI), a Johor state-backed company, and the three main domestic telecommunication operators (telcos), Celcom Axiata Bhd, Maxis Broadband Sdn Bhd and Digi Telecommunications Sdn Bhd, that obligates the telcos to make monthly rental payments of defined amounts for usage of telecommunication towers (telco towers). The ratings continue to be supported by structural protections through regular trapping of rental payments from the telcos to mitigate the liquidity and commingling risks. Proceeds from the issuance of notes will only fund completed towers, hence noteholders do not assume construction risk. The rating of the Junior Notes reflects subordination to the Senior Notes in respect of profit payment and principal repayment.

DHTI, the parent company of DHTI Capital, is a licensed network facilities providers (NFP) under the Communications and Multimedia Act 1998. As an NFP, DHTI has the sole right to build, manage, lease and maintain telecommunication infrastructures (including towers) in the state of Johor for a period of ten years until 2015. It is 20%-owned by the Johor State Government’s wholly-owned subsidiary YPJ Corporation Sdn Bhd with the remaining equity interest held by Crestcom Sdn Bhd (67%) and Duta Harmoni Sdn Bhd (13%). DHTI’s 10-year Licence Agreement with the telcos provides visibility and predictability to DHTI Capital’s rental stream throughout the term of the notes. The quantum of rent payable by the telcos is determined by factors such as the height of the towers, the number of telcos sharing the towers and the variation orders for the towers (if any). The rental payments are assigned to DHTI Capital, ultimately to the Trustee, which acts in the capacity of an agent and trustee for the noteholders.

DHTI Capital’s revenue stream is not exposed to any construction risk while commingling and liquidity risks are somewhat mitigated through regular trappings of rental payments from the telcos into a trustee-controlled account. Of the total rental payments, 60% are directed into a sinking fund account for meeting the debt obligations of the notes and the remainder into an operating account, which shall be utilised towards meeting operating and maintenance costs, mitigating the operation and maintenance risks of the transaction.

To date, DHTI Capital has issued RM55 million Senior Notes and RM3 million Junior Notes, backed by 119 towers. The group has paid down RM15 million of the Senior Notes, leaving RM40 million Senior Notes and RM3 million Junior Notes outstanding. MARC notes that to date, rental payments from the existing telco towers have been timely and expects the stable rental performance to continue. The cash flow forecast exhibits resilience to the applied sensitivity and stress tests on low average amount of variation orders and tower sharing ratios for future towers. The absence of a time limit on the availability of the rated facilities exposes the transaction to the risk of asset-liability and accordingly, cash flow mismatches. Moderate stress test scenarios based on single as well as joint tenancies, lower-than-experienced variation orders and annual drawdowns of RM10 million until 2013 indicate that DHTI Capital’s financial service cover ratio would remain in compliance with the covenanted minimum FSCR of 1.5 times for both the Senior and Junior Notes prior to the maturity of the Senior Notes in 2015. In view of the high cellular telecommunication coverage in the state of Johor, the demand for new telco towers is likely to remain low, reducing the likelihood of further drawdowns on the facility after May 2011.

The current stable outlook for the notes incorporates expectations of continued timely payments from the existing towers and satisfactory rental performance of new towers going forward.

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