MARC has affirmed its ratings of MARC-1ID/AAID and A+ID on Cellular Structures Sdn Bhd’s (CSSB) RM60.0 million Senior MUNIF/IMTN (Senior Notes) and RM8.0 million Junior IMTN (Junior Notes) respectively with stable outlook. 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.

MARC has maintained the two-notch rating differential between the Senior Notes and Junior Notes to reflect the latter’s subordination relative to the position of Senior debt. There are no periodic profit payments on the Junior Notes which mature one year after the Senior Notes. The notching between the Senior Notes and Junior Notes was narrowed from three notches to two notches at MARC’s January 2010 review.
 
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 Licence 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 by the telcos 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. Although drawdowns are allowed throughout the tenure of the transaction, the financial projections assumes that drawdowns under the facility will be concluded in the first three years to allow sufficient rental payments to be generated over the remaining tenure of the notes in order to ensure full and timely payment of principal at maturity. The reduction of the limit of CSSB’s Senior Notes from RM184.0 million to RM60.0 million with effect from April 28, 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.

CSSB’s updated cash flow projections yield minimum and average FSCRS of 4.71x and 28.96x respectively based on no further drawdowns for 2010. The robustness of cash flow coverages is due to the better-than-expected completed tower profiles in terms of tower heights, sharing ratio and additional rental received from the variation orders, all of which will contribute to higher rentals per tower over time. The strong credit standing of the telcos and their prompt payments to date mitigate the risks of non-payment of rental and delay in collection of receivables.

The drawdown of the Senior Notes is subject to the completion of construction of towers by KJS, thus eliminating construction risk. In view of the high cellular telecommunication coverage in the state of Selangor, the demand for new telco towers is likely to remain low, reducing the likelihood of further drawdowns on the facility after July 2010. 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 RM25.0 million of the Senior Notes and at present, RM20.0 million Senior Notes and RM5.0 million Junior Notes remain outstanding.

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 throughout the tenure of the transaction.

Contacts:
David Lee, 03-2090 2255/ david@marc.com.my;
Sandeep Bhattacharya, 03-2090 2247/ sandeep@marc.com.my.