MARC has affirmed the ratings of special purpose company Serrisa Sinar Berhad’s (Serrisa Sinar) RM200 million ICP/IMTN notes (Senior Notes) and RM20 million Junior IMTN (Junior Notes) at MARC-1ID/AAID and A+ID respectively. The outlook on the ratings is stable. The 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 Common Tower Technologies Sdn Bhd (CTT), state-backed company of Sabah and the three main domestic telecommunication operators (telcos) - Celcom Axiata Bhd (formerly known as Celcom (Malaysia) Berhad), 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 also consider structural protections through regular trapping of rental payments from the telcos to mitigate the liquidity and commingling risks and elimination of construction risk of the towers through imposition of pre-drawdown conditions. In addition, Weida Works Sdn Bhd’s (Weida Works) exclusivity, pursuant to its joint-venture agreement with CTT, in the construction of telecommunication towers in the state of Sabah ensures its monopolistic position. The rating of the Junior Notes reflects its subordination to the Senior Notes in respect of profit payment and principal repayment.

Wholly-owned by Weida (M) Bhd, Weida Works entered a joint-venture agreement with CTT, which is the state-backed company that holds the exclusive rights to construct and manage telecommunication towers and structures in Sabah. Pursuant to the joint-venture agreement with CTT, Weida Works has the exclusivity to finance and construct the towers or structures in the state. Consequently, Serrisa Sinar was established as a standalone special-purpose company for the purpose of issuing the notes and collecting rental payments from the telcos. In 2005, CTT entered an exclusive 10-year License Agreement (with renewal option of five years) with the telcos, which, among others, defines the rental payments payable by the telcos to CTT. As consideration for provision of services, CTT assigns the rental payments to Weida Works, which in turn assigns the same to Serrisa Sinar. The telcos use the towers on a shared basis with the quantum of the rental payments determined by factors such as the location and height of the towers, the number of telcos sharing the towers and the variation order for the towers (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.

Drawdowns on the notes are restricted to completed towers, thus eliminating construction risk, and the risk of late commencement of payment is mitigated by the pre-drawdown conditions of the transaction that require documentary evidence of commencement of payment streams from the telcos before the rental receivables are sold to Serrisa Sinar. Meanwhile, 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 received, 60% are directed into a sinking fund for meeting the debt obligations of the notes and the remainder is channelled to Weida Works and shall be allocated, among others, towards operating and maintenance costs, alleviating the operation and maintenance risks of the transaction.

As of September 2009, Serrisa Sinar has issued RM115 million Senior Notes and RM5 million Junior Notes, backed by 189 towers. To date, Serrisa has pared down RM15 million of the Senior Notes in 2009. The conclusion of all drawdowns within the first three years of the facility as assumed in the cash flow projections is important to ensure a sufficient amount is built up to meet the redemption of the notes. The cash flow forecast exhibits resilience to the applied sensitivity and stress tests, which include delayed collections of receivables, lower average amount of variation orders and lower tower sharing ratios amongst others. Minimum FSCRs were maintained above 1.5 times under the simulated scenarios for both the Senior and Junior Notes. MARC notes that to date, rental payments from the existing telco towers have been timely and expects stable rental performance to continue.

The transaction remains vulnerable to event risk as there is no insurance coverage against loss of revenue in the event of destruction of any of the towers. However, Serrisa Sinar’s potential exposure to event risk is assessed to be small in light of the relatively large number of towers involved in this transaction and the relatively short period required to reconstruct a tower. MARC also notes that there has been no destruction of towers to date.

The current stable outlook for the notes reflects the timely rental payments from the existing towers and the expectation of stable rental performance from new towers.

Contacts:
Nadia Edmaz Abdul Hadi, 03-2090 2262/ nadia@marc.com.my;
Sandeep Bhattacharya, 03-2090 2247/ sandeep@marc.com.my