MARC has affirmed the ratings of special purpose company DHTI Capital Sdn Bhd’s (DHTI Capital) RM110 million Islamic Commercial Papers/Islamic Medium Term Notes (Senior Notes) and RM10 million Junior Islamic Medium Term Notes (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 D’Harmoni Telco Infra Sdn Bhd (DHTI), a Johor state-backed company, 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 telco towers through imposition of pre-drawdown conditions. In addition, DHTI’s exclusivity as the only state-backed company that is given the rights to construct and manage the telco towers in the state of Johor ensure its near monopolistic position. The rating of the Junior Notes reflects subordination to the Senior Notes in respect of profit payment and principal repayment.

DHTI, the holding company of DHTI Capital, was awarded a Network Facilities Providers License  under the Communications and Multimedia Act 1998 to build, manage, lease and maintain telecommunication infrastructures (including towers) for a period of ten years until 2015. It is 20%-owned by the Johor State Government’s wholly-owned subsidiary YPJ Corporation Sdn Bhd, while the remaining equity stake is held by Crestcom Sdn Bhd and Duta Harmoni Sdn Bhd. In 2005, DHTI entered an exclusive 10-year License Agreement with the telcos, which among others defines the rental payments payable by the telcos to DHTI. The telcos use the towers on a shared basis with the quantum of the rental payment determined by factors such as the height of the towers, the number of telcos sharing the towers and the variation orders for the towers (if any). The rental payments are assigned to DHTI Capital upon advancing proceeds of drawdowns to DHTI for the purpose of financing of acquisitions and construction of telco towers. The rental payments for the telco towers will ultimately be assigned to the Trustee, who acts as an agent and trustee for the noteholders. This contractual agreement provides a high degree of visibility to the cash flow stream that supports the finance service cover ratio under the notes.

Drawdowns on the notes are restricted to completed towers, thus eliminating construction risk, and the risk of late commencement of payment at the initial stage of the lease is mitigated by the pre-drawdown condition of the transaction that requires documentary evidence of payment stream from the telcos before DHTI Capital advances the proceeds from drawdowns to DHTI. 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, 60% are directed into a sinking fund for meeting the debt obligations of the notes and the remainder into an operating account, which shall be utilised towards meeting operating and maintenance costs, alleviating the operation and maintenance risks of the transaction.

MARC also notes the absence of a cap on the drawdown period, which will expose the transaction to risk of asset-liability mismatch. Nevertheless, the risk is somewhat limited by DHTI’s ability to accurately forecast the cash flow streams from the towers given the high predictability of the rental payment. These will likely to prevent DHTI Capital from drawing down the facility beyond May 2011.

To date, DHTI Capital has issued RM55 million Senior Notes and RM3 million Junior Notes, backed by 119 towers. The group has pared down RM10 million of the Senior Notes in 2009 and at present, RM45 million Senior Notes and RM3 million Junior Notes remain outstanding. 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. The financial service cover ratio (FSCR) was maintained above the covenanted minimum FSCR of 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.

However, 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, DHTI Capital’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 that the stable rental performance of new towers will continue.

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