MARC has assigned ratings of AAAIS and MARC-1IS to Pinnacle Tower Sdn Bhd’s (PTSB) RM400.0 million Islamic Medium-Term Notes (IMTN) and RM50.0 million Islamic Commercial Papers (ICP) (Islamic Securities), respectively. The ratings carry a stable outlook. PTSB, wholly-owned by Sarawak-based Sacofa Sdn Bhd (Sacofa), was incorporated for the sole purpose of raising financing via the issuance of the proposed Islamic Securities. Sacofa, incorporated in 2001 and 69.6%-owned by the State Financial Secretary of Sarawak (SFS), has been spearheading the state government’s initiatives since 2002 to expand the telecommunication network infrastructure in the state under an exclusive 20-year concession to construct and maintain telecommunication towers and structures (towers).  

At closing, PTSB is expected to issue RM400.0 million IMTN representing its initial contribution to the Musyarakah Venture to acquire the beneficial ownerships of 257 completed telecommunication towers (Musyarakah Assets) from Sacofa for RM400.0 million. Concurrently, PTSB will lease its portion of the Musyarakah Assets to Sacofa under a seven-year Ijarah agreement. The lease payments (Ijarah Payments) will fund the profit payments and principal repayments on the IMTN. The proposed transaction structure requires all of Sacofa’s revenue to be deposited into a designated account with priority given to the Ijarah Payments ahead of all other expenses. Sacofa will utilize the proceeds from the initial issuance mainly towards refinancing its existing Sukuk Istisna’ and Sukuk Ijarah issued under its wholly-owned subsidiary, Sarawak Gateway Sdn Bhd.

The ratings are supported by Sacofa’s ability to meet the Ijarah Payments under the Ijarah agreement, and accordingly, reflect Sacofa’s status as a government-related entity of State Government of Sarawak and its strategic importance as Sarawak’s telecommunication provider. SFS has and is expected to inject new equity capital into Sacofa to ensure compliance with its debt-to-equity (DE) covenant under the Islamic Securities. The ratings also incorporate Sacofa’s exclusive rights in developing and maintaining the telecommunication towers and structures in Sarawak, its rental payment stream from creditworthy telecommunications companies (telcos), the transaction’s sound payment structure as well as a charge over and assignment of Sacofa’s revenue collection account and other designated accounts.

The ratings are moderated by Sacofa’s high gearing ratio and the potential for higher than expected construction costs on account of raw material price volatility, going forward. The stable outlook is premised on Sacofa’s expected steady revenue stream throughout the tenure of the transaction, backed by 411 completed towers as at December 31, 2008.

Under the transaction, PTSB will, from time to time, issue Islamic Securities, the proceeds from which will represent its capital contribution to its Musyarakah Venture with Sacofa via a Musyarakah Agreement based on an agreed capital contribution ratio. Sacofa’s contribution to the venture shall be either in the form of cash and/or in kind. Consequently, the Musyarakah Venture will from time to time acquire Musyarakah Assets with Sacofa appointed as the manager.

Upon completion of construction, the towers are leased to major telcos, Celcom (Malaysia) Bhd. (Celcom), Maxis Broadband Sdn. Bhd. (Maxis) and Digi Telecommunications Sdn. Bhd. (DiGi), which are obliged to make monthly rental payments to Sacofa in return for the right to use the towers under a 10-year Master License Agreement that commenced in June 2005.

For financial year ended December 31, 2007 (FY2007), Sacofa’s revenue grew by 65.6% to RM61.1 million arising mainly from higher revenue contribution from the towers segment backed by 327 telco towers (FY2006: 151). Based on unaudited results for FY2008, Sacofa’s revenue continued on an uptrend to RM90.5 million backed by 411 telco towers. On February 18, 2009, SFS provided an equity injection of RM31.0 million which resulted in Sacofa’s D/E ratio reducing from 4.15 times to 3.13 times based on pro-forma unaudited accounts for the financial period ended December 31, 2008, below the gearing covenant of 3.50 times required prior to the issuance of the Islamic Securities. Sensitivity analyses on Sacofa’s cash flow projections indicate moderate resilience to increases in construction costs, reduction in the number of towers constructed and delay in rental payments. To date, rental payments from the telcos have been timely and the higher construction costs incurred to date have been largely due to variation orders which are passed on to the telcos.

Contacts:
Azlina Mohamed Noor Beg, 03-2090 2254/ azlina@marc.com.my;
Anthony Eng, 03-2090 2255/ anthony@marc.com.my,