MARC affirms the ratings of Serrisa Sinar Bhd’s (Serrisa Sinar) RM200 million Islamic commercial papers/Islamic Medium Term Notes (ICP/IMTN) (Senior Notes) and RM20 million Junior IMTN (Junior Notes) at MARC-1ID / AAID and AA-ID  respectively. The outlook of the ratings is stable. The rating of the Junior Notes reflects its subordination to the Senior Notes in respect of profit payment and principal repayment. The rating action affects RM35 million of outstanding notes issued under the programme comprising RM30 million (RM20 million IMTNs and RM10 million ICPs) of Senior Notes and RM5 million of Junior Notes as at end-August 2013.

Serrisa Sinar is a special purpose company that was established to issue Islamic debt to finance the purchase of contract receivables in respect of completed telecommunication (telco) towers constructed by Weida Works Sdn Bhd (Weida Works). Weida Works, a wholly-owned subsidiary of Weida (M) Bhd, obtained the rights to finance and construct telecommunication towers or structures in Sabah through its joint-venture with state-backed company Common Tower Technologies Sdn Bhd (CTT), which holds exclusive rights to construct and manage telecommunication towers and structures in Sabah. The revenue from tower rental received is used to meet the obligations under the notes.

The ratings on the notes primarily reflect the predictable source of cash flow generated from the assigned monthly lease rentals of telco towers and the credit risk of the lessees: Maxis Berhad, Celcom Axiata Berhad and DiGi Telecommunications Sdn Bhd. The contractual nature of the lease rentals continue to provide structural stability to debt service coverage. Serrisa’s actual finance service coverage ratio (FSCR) for 2012 of 5.5 times (x) remains within MARC’s expectations for its rating level and in compliance with its FSCR covenant of 1.5x. Furthermore, under the long-term licence agreement with the mobile operators, CTT is only responsible for the fairly basic maintenance of the tower sites and related infrastructure which significantly limits noteholders’ exposure to performance risk.

The senior notes’ rating is weak-linked to MARC’s AA/stable public information rating on the lowest rated lessee. The junior notes, meanwhile, continue to be rated one notch below the long-term rating on the senior notes to reflect its subordination to the senior notes in respect of profit payment and principal repayment.

The cash flow stream for debt service is currently provided by lease rentals on 242 telco towers. Pursuant to the terms of the notes issuance, the assigned monthly lease revenues are received in a trustee-controlled collection account. The funds in the collection account are distributed in the following manner: 60% is paid into a sinking fund account for debt service until April 23, 2015, the scheduled final redemption date for outstanding senior notes and the balance 40% is paid to the Weida Works to cover maintenance costs among others. After April 2015, a 40:60 allocation will apply to the distribution of funds for debt service and to Weida Works.

With forecasted monthly lease rentals of RM3.89 million, operating cash flow of RM26.8 million for 2014 and designated account balances of RM7.5 million as of end-August 2014, Serrisa Sinar is well placed to meet its maturing senior notes totalling RM30 million in 2014. MARC understands from management that Serrisa plans to make an early redemption of its remaining RM5 million junior notes.

The stable outlook on the ratings reflects MARC’s expectation of continued predictability of lease rentals from telco tower lessees over the short remaining tenure of the rated debt. In MARC’s view, this tempers the downside risk posed by a substantial change in the credit quality of the lowest rated lessee.

Contacts:
Se Tho Mun Yi, +603-2082 2263/ munyi@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.