MARC has affirmed the ratings of special purpose company Tele-Flow Capital Sdn Bhd’s (Tele-Flow Capital) RM90.0 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium Term Notes (MUNIF/IMTN) Facility (Senior Notes) at MARC-1ID/AAID. The ratings reflect the credit strength of the telecommunication operators (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-fence the stream of rental payments from the telcos. The ratings also consider structural protections through regular trapping of rental payments from the telcos to mitigate the liquidity and commingling risks and the elimination of construction risk of the telecommunication towers (telco towers) through imposition of pre-drawdown conditions. 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 telco towers and structures in the state.

Concurrently, MARC has upgraded Tele-Flow Capital’s long-term rating to A+ID from AID in respect of Tele-Flow Capital’s RM10.0 million Junior IMTN Facility (Junior Notes). The upgrade in the long-term rating reflects MARC’s expectation of sustained high cash flow coverage for the notes with the completion of 128 out of 142 towers originally contemplated to be financed under the rated notes. The progressive reduction in availability under the Senior Facility commencing 2010 provides added assurance that Tele-Flow Capital will generate sufficient rental collections from financed towers, both present and future, over the remaining life of the transaction to meet the rated obligations. MARC had previously notched the Junior Notes three notches below the rating on the Senior Notes to reflect 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 Axiata Bhd (formerly known as 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 variation orders 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 facility. As the telcos provide the main source of repayment for the notes, any significant deterioration in their credit profile may lead to a revision to the transaction’s ratings. The cash flow forecast exhibits resilience to the applied sensitivity and stress tests due to the good performance of the current asset pool. All simulated scenarios display an FSCR above the covenanted minimum FSCR of 1.5 times for both the Senior and Junior Notes. MARC notes that to date, rental payment performance of the telcos has been satisfactory. The risk of slow payment from the telcos is low in view of their credit standing and good payment track record, while Tele-Flow Capital makes continuous efforts to maximise telco tower sharing which will translate into higher rental income per tower.
 
Drawdown on the notes is restricted to completed towers, thus eliminating construction risk. To date, Tele-Flow Capital has issued RM60.0 million Senior Notes and RM5.0 million Junior Notes backed by the completion and acquisition of 128 towers. Tele-Flow Capital has pared down RM20.0 million of the Senior Notes and at present, RM40.0 million Senior Notes and RM5.0 million Junior Notes remain outstanding. 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. Operational risks are considered low in view of the minimal maintenance required on the towers. Nonetheless, event risk remains a concern as insurance procured on completed towers does not cover loss of revenue in the event any of the towers are destroyed.

The current stable outlook for the notes reflects the timely rental payments from the existing towers and the expectation that the stable rental performance will continue for the new towers.
 
Contacts:
David Lee, 03-2090 2255/ david@marc.com.my;
Sandeep Bhattacharya 03-2090 2247/ sandeep@marc.com.my