MARC has affirmed the rating of AA-ID on Instacom SPV Sdn Bhd’s (ISPV) RM200 million Murabahah Medium-Term Notes (MMTN) programme. The rating carries a stable outlook. ISPV is a special purpose company owned by Instacom Engineering Sdn Bhd (IESB), and incorporated to facilitate the issuance of the Sukuk for the sale and purchase of completed telecommunication towers and infrastructure. Return to the Sukukholders is funded by monthly lease rental payments and/or lump sum payments from the country’s three largest operators of cellular services - Celcom (Malaysia) Berhad (Celcom), Digi Telecommunications Sdn Bhd (DiGi) and Maxis Broadband Sdn Bhd (Maxis). Rating stability is conditioned upon transaction obligors maintaining their individual credit quality within the AA rating level. Accordingly, the affirmed rating reflects the credit strength of the telecommunication companies (telcos) in relation to their capacity to meet their obligations, structural features which prevent originator commingling with respect to contractual revenue streams securing the Sukuk, the priority of debt service on the Sukuk in the payment waterfall and elimination of construction risk.
 
IESB, a sub-contractor of telecommunication infrastructure, was awarded a three-year turnkey contract for the construction of the telecommunication towers from Desabina Industries Sdn Bhd (DISB), a state-backed company (SBC) for Terengganu. DISB has a ten-year license, expiring on June 9, 2015 with an option to renew for another five years, to build and lease out telecommunication towers to the local telcos. The license was granted by the Malaysian Communications and Multimedia Commission (MCMC), a regulatory body which oversees the regulatory framework for the telecommunications industry. DISB as a SBC has an exclusive license to build and lease out telecommunications towers to the cellular players in Terengganu.

DISB entered into a back-to-back License Agreement with Celcom, DiGi and Maxis for leasing the telecommunication towers in return for monthly rental payments over a seven years period. To facilitate the securing of financing for construction of telecommunication towers, DISB allowed re-assignment of all its rights, benefits and title to the telecommunication towers to IESB. Under the terms of the rated facility, IESB may also drawdown funds in respect of completed infrastructure pertaining to contracts with other SBCs, Maxis, Celcom and DiGi. Additionally, IESB has entered into a construction contract with DiGi, in respect of which, payment will be received in one lump sum upon completion and successful handover of the telecommunication towers to DiGi.

ISPV’s ability to service its obligations under the MMTN programme remains strong, as indicated by its Finance Service Coverage Ratio (FSCR) of 7.97 times against its minimum required FSCR of 1.25 times as at August 31, 2008 as confirmed by the trustee. ISPV had cash balances of RM19.8 million in its Finance Service Reserve Account (FSRA) relative to upcoming 2009 maturities of RM10 million due in May 2009. Up to August 31, 2008, work orders totalling RM128 million from DiGi and RM67.9 million from DISB have been secured by IESB. A total of RM135 million was drawn on the MMTN programme, of which RM54 million has been repaid leaving outstanding balance of RM81 million.

IESB’s three-year contract with DISB was terminated six months prior to expiry on July 30, 2008. Although this has resulted in a smaller number of towers constructed for DISB, the loss of revenue from forty towers that would have been otherwise constructed is expected to be covered by additional work orders secured from DiGi. The work orders secured from DiGi require only short-term bridge funding on account of their lump sum non-deferred payment arrangements.

Contacts:
Sabesh Parameswaran 03-2090 2260/ sabesh@marc.com.my;
Francis Xaviour Joe 03-2090 2279/ fxjoe@marc.com.my;