MARC has affirmed the ratings of Cellular Structures Sdn Bhd’s (CSSB) RM184.0 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) which are contractually obligated to make fixed monthly rental payments for the towers over a period of ten years. The rating incorporates structural features which ring-fence the 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.

Concurrently, MARC has upgraded CSSB’s long-term rating to A+ID from AID in respect of CSSB’s RM8.0 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 105 out of 140 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 CSSB 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.

CSSB is a special purpose company incorporated solely for the purpose of issuing notes under the facility to fund the construction of towers and the acquisition of completed towers in Selangor and collecting periodic rental payments from telcos as consideration for the use of the towers. CSSB’s holding company, Konsortium Jaringan Selangor Sdn Bhd (KJS) was appointed as the management services company to undertake the construction of telco towers in Selangor.

Under a License Agreement with Celcom Axiata Bhd (formerly known as Celcom (Malaysia) Bhd), Maxis Broadband Sdn Bhd and Digi Telecommunications Sdn Bhd in April 2005 covering a period of ten years, monthly rental payments are payable in accordance with an agreed licence fee schedule by the telcos that takes into consideration the height of the tower, number of telcos sharing the tower and variation orders for the tower (if any). This contractual arrangement provides a high degree of cash flow stability that supports the required minimum finance service cover ratio (FSCR) 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 CSSB makes continuous efforts to maximise telco tower sharing which will translate into higher rental income per tower.

The drawdown of the Senior Notes is subject to the completion of construction of towers by KJS, thus eliminating construction risk.  To date, CSSB has issued RM45.0 million Senior Notes and RM5.0 million Junior Notes backed by the completion and acquisition of 105 towers. CSSB has pared down RM20.0 million of the Senior Notes and at present, RM25.0 million Senior Notes and RM5.0 million Junior Notes remain outstanding. The rental payments from the telcos which form the source of profit payment and principal redemption for the Senior and Junior Notes are assigned to the bondholders by CSSB. In addition, the transaction structure requires approximately 60% of the monies from the collection account be paid into the sinking fund account specifically earmarked for payment of principal and profit of the Senior Notes and Junior Notes, thus mitigating liquidity risk. Operational risks are considered low in view of the minimal maintenance required on the towers. However, the transaction is exposed to event risk as insurance procured on completed towers does not cover revenue generation loss 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