MARC has affirmed the ratings of special purpose company Tele-Flow Capital Sdn. Bhd.’s (Tele-Flow Capital) RM90.0 million MUNIF/IMTN Facility (Senior Notes) and RM10.0 million Junior IMTN Facility (Junior Notes) at MARC-1ID /AAID and AID, respectively. The ratings reflect the credit strength of the telecommunication companies (telcos) as the source of repayment for the notes backed by a 10-year licensing agreement as well as structural features of the transaction which ring-fences the stream of rental payments from the telcos, and the elimination of construction risk. In addition, its holding company, Tele-Flow Corporation Sdn. Bhd (TCSB), has a 49% stake in Yiked Bina Sdn Bhd (YBSB), a Kedah state government-backed company that holds the exclusive rights to construct and manage telecommunication towers (towers) and structures in the state. The rating of the Junior Notes reflects its subordination to the Senior Notes in respect of profit payment and principal repayment.

Tele-Flow Capital, wholly-owned by TCSB, was established for the purpose of issuing notes to fund the construction of towers and to acquire completed towers in Kedah. A 10-year Licence Agreement between YBSB and Celcom (Malaysia) Bhd, Maxis Broadband Sdn Bhd and Digi Telecommunications Sdn Bhd signed in April 2005, underpins the structured financing and stipulates the amount of monthly rental payments payable to YBSB by the telcos in accordance with an agreed license fee schedule. As consideration for providing management services, YBSB assigns the rental payments to TCSB, which in turn, assigns the same to Tele-Flow Capital. The telcos use the towers on a shared basis with the quantum of the rental payments determined by factors such as the height of the respective tower, the number of telcos sharing the tower and the variation order for the tower (if any). This contractual arrangement provides a high degree of visibility to the cash flow stream that supports the finance service cover ratios under the notes.

Drawdown on the notes is restricted to completed towers, thus eliminating construction risk. To date, Tele-Flow Capital has issued RM55.0 million of the Senior Notes and RM5.0 million of the Junior Notes, backed by 117 completed towers. Operational risks are considered low in view of the minimal maintenance required by TCSB. In addition, the transaction structure requires 60% of the monies from the collection account to be paid into a sinking fund account specifically earmarked for payment of principal and profits of the notes, thus mitigating liquidity risk. Nonetheless, event risk remains a concern as insurance procured on completed towers does not cover loss of revenue in the event some of the towers are destroyed.

At present, RM45.0 million of the Senior Notes and RM5.0 million of the Junior Notes remain outstanding. The conclusion of all drawdowns within the first three years of the facility as assumed in the cash flow projections is important to allow the build up of collected rentals to meet the redemption of the notes at maturity. Cash flow forecast exhibits moderate resilience to the applied sensitivity tests, with delays in rental receipts having the most impact on debt servicing ability. Nonetheless, MARC notes that to date, rental payments have been timely and expects the stable rental performance to prevail.  

Contacts:
Azlina Mohamed Noor Beg, 03-2090 2254/ azlina@marc.com.my;
Afidah Shahbudin, 03-2090 2269/ afidah@marc.com.my