MARC has affirmed its ratings of MARC-1ID/AAID and A+ID on Tele-Flow Capital Sdn Bhd’s (Tele-Flow Capital) RM90.0 million MUNIF/IMTN Facility (Senior Notes) and RM10.0 million Junior IMTN Facility (Junior Notes) respectively with stable outlook. 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.

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.

Tele-Flow Capital, wholly-owned by TCSB, is a special purpose company 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 licence 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. In the current financial year, MARC observes that there are no further drawdowns from the facility. Nonetheless, MARC observed through a series of sensitivity tests that the minimum Finance Service Cover Ratio will be lower than the covenanted level of 1.50 times in 2013, the final year of the Senior Notes facility, should any additional towers be built and/or acquired or further drawdowns from the facility. While MARC draws comfort from the telcos’ good track record of timely payment of rental fees, these results affirm the agency’s earlier analysis that the drawdowns under the facility should be concluded in the first three years to allow sufficient time for accumulation of rental payments to meet the redemption of notes at maturity.

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 130 towers. Tele-Flow Capital has pared down RM25.0 million of the Senior Notes, and at present RM35.0 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. 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 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.