MARC has affirmed the ratings of MARC-1IS and AAAIS to Pinnacle Tower Sdn Bhd’s (PTSB) RM50 million Islamic Commercial Papers (ICP) and RM400 million Islamic Medium Term Notes (IMTN), respectively. The outlook on the ratings is stable. The ratings are underpinned by the stable rental payments from the telecommunication companies (telcos) to parent company, Sacofa Sdn Bhd (Sacofa) which are the source of ijarah payments for the facilities. The ratings also consider Sacofa’s exclusive rights to develop and carry out maintenance on telecommunication towers and structures (telco structures) in Sarawak, its status as a government-related entity of the State Government of Sarawak and its strategic importance to Sarawak’s telecommunication industry. This is evidenced by the state government’s willingness to provide financial support to Sacofa to ensure compliance with its gearing covenants. At the same time, the available structural enhancements in the transaction continue to provide support to the ratings. The stable outlook is premised on the expectation of continued steady revenue streams from Sacofa’s telco towers and fibre optic businesses.

PTSB is a special purpose vehicle wholly-owned by Sarawak-based Sacofa, incorporated for the sole purpose of raising financing via the issuance of the ICP/IMTN programme. Incorporated in 2001 and 69.6%-owned by the State Financial Secretary (SFS) of Sarawak, Sacofa and has been fulfilling its mandate of expanding the telecommunication network infrastructure in the state, since 2002, under an exclusive 20-year concession to construct and maintain telco structures.

At closing, PTSB issued RM400 million IMTN representing its contribution to the Musyarakah Venture to acquire the beneficial ownership of 257 completed telco towers (the Musyarakah Assets) from Sacofa for RM400 million. Concurrently, PTSB has leased its portion of the assets to Sacofa under a seven-year ijarah agreement. The ijarah payments will fund the profit payments and principal repayments of the IMTN. The transaction structure ring-fenced all Sacofa’s revenue into designated accounts that are joint-controlled by Sacofa and the security trustee, which gives priority to ijarah payments ahead of Sacofa’s other expenses. Sacofa’s core revenue driver is lease payments from its telco towers segment which contributed over 70% of its top-line in financial year ended 2009 (FY2009), with fibre optic businesses generating the balance of its revenue. Telco towers and the fibre optic cables are leased to major telcos Celcom (M) Bhd, Maxis Broadband Sdn Bhd and Digi Telecommunication Sdn Bhd with preferable payment terms. The telcos are obliged to make monthly rental payment to Sacofa in return for the right to use the towers under a 10-year Master Licence Agreement that commenced in June 2005, and variation costs incurred during the construction are passed on to the telcos. Meanwhile, Sacofa’s fibre optic businesses run on advance payments based on contracted capacity and requests for new networks would normally be accompanied by long-term agreements. MARC also notes that payments by the telcos have been timely due to competitive and operational reasons.

For financial year ended December 31, 2009 (FY2009), Sacofa’s revenue was up by 18% to RM106.7 million in tandem with 18% increase in number of completed towers during the financial period. Sacofa’s operating profit margin remained stable in FY2009 at 54.6% after it recorded a drop in FY2008 to 54.3% from 62.4% in FY2007. The extraordinary high margin in FY2007 was due to a one-off write-back of Sacofa’s non-operating income of RM10.1 million in FY2007. Sacofa’s debt-to-equity ratio improved from 4.48 times (x) in FY2008 to 2.73x in FY2009 mainly through equity injection of RM30.1 million provided by SFS prior to the facility’s issuance in February 2009. Sensitivity analyses on Sacofa’s cash flow projections indicate resilience to increases in construction costs and declines in its fibre optics businesses with Sacofa expected to remain in compliance with the facility's finance service coverage ratio covenant of 1.75x under moderate stress scenarios.

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