View Credit Analysis Report (6053632)

SubcategoryStructured Finance
Date Article2021-03-29 00:00:00
Rating action

MARC has assigned final ratings of MARC-1IS /AAIS to Cellco Capital Bhd’s (Cellco) proposed RM520 million issuance (Issue 1) under its Islamic Commercial Papers/Islamic Medium-Term Notes (Sukuk Ijarah Programme) with a combined limit of up to RM1.0 billion. The ratings outlook is stable


Cellco is a special-purpose entity set up to raise funds via the Sukuk Ijarah Programme for Stealth Solutions Sdn Bhd (Stealth), an independent tower company and the originator of this transaction. It will purchase completed telecommunication (telco) towers from Stealth at prices equivalent to the proceeds from the sukuk issuance, concurrently leasing them back to Stealth for a predetermined lease period at an agreed rental amount that reflects the principal and profit portions of the sukuk. 

The assigned ratings reflect Stealth’s strong cash flow visibility backed by long-term lease agreements with key domestic telco players, low counterparty risk of telco players, and the growing demand for telco towers. The ratings also factor in the absence of construction risk given the telco towers are revenue-generating with a locked-in revenue of approximately RM48 million p.a. Termination risk of the lease agreements is mitigated by the non-cancellable lease terms; non-renewal risk is deemed low given that the towers remain critical infrastructure for telco players, which would also be a strong incentive to avoid relocating equipment to minimise service disruption. 

The low counterparty risk is premised on the creditworthiness of the three largest Malaysian telcos, namely Maxis Berhad, Celcom (Malaysia) Berhad and Digi Telecommunications Berhad, which currently accounted for about 56% of Stealth’s rental income. Concentration risk is deemed manageable, factoring in the long-standing relationships with the telcos and the high switching costs, particularly arising from operational factors. Rental payments have also been prompt, with average receivable days of about 23 days in 2020 (annualised basis) against credit terms of 30 days. 

The initial issuance of RM520 million will be backed by lease payments from 531 telco towers injected into Cellco; the lease payments will be captured into the designated accounts controlled by the Security Trustee. The relatively stable tower business model provides Stealth with revenue visibility and the capacity to generate a strong earnings before interest, tax, depreciation and amortisation (EBITDA) margin, which stood at 42% in 2019. The average remaining contract life stood at about six years as at end-November 2020 (excluding options to renew). However, embedded in the lease agreements are lower tower rentals on contract renewals. This notwithstanding, an increase in tenancy ratio from additional tenants from current tenancy ratio of 1.5x or co-locations would support EBITDA margins from declining going forward. 

The rating agency also notes that telco towers are on land sites which typically have three-year lease terms, shorter than the tower lease agreements. Risk of operational disruption through non-renewal of land leases is largely mitigated by the company’s healthy track record and by the fact that it has no significant concentration to a single landowner.

In terms of cash flow, Cellco projects a strong liquidity position with ample covenant headroom. MARC’s sensitised case has assumed a low single-digit y-o-y tenancy growth and an increase in operating expenses. Under this scenario, average and minimum FSCRs are projected at about 6.6x and 2.4x, well above the minimum covenanted 1.5x. While the strong FSCRs are attributable in part to a large cash cushion from a portion of the sukuk proceeds, there is a likelihood that a substantial portion would be utilised by Stealth for capex and working capital requirements. MARC expects the FSCRs to be maintained above 2.0x that would be in line with the assigned ratings.  

Rating outlook

The stable outlook reflects MARC’s expectations of stable operating performance, underpinned by timely lease payments, and the projected average post-distribution finance service cover ratio (FSCR) being maintained above 2.0x.

Key strengths
  • Strong cash flow visibility backed by long-term lease contracts on telco towers
  • Strong demand for telco towers from telco players
  • Lease payments from telcos captured in trustee-controlled designated accounts
  • Absence of construction risk
Key risks
  • Land lease risk
  • Contract renewal risk

Counter Viewed29
Price Freemembers500.00
Price Paidmembers0.00