Feb 10, 2012

Signal for Bakrie Telecom from S&P

Standard & Poor's Ratings Services (S&P) said yesterday that it had lowered its long-term corporate credit rating on Indonesia-based limited mobility wireless operator PT Bakrie Telecom Tbk (BTEL) to CCC+ from B.
The outlook is negative. "We also lowered our rating on Bakrie Telecom Pte. Ltd.'s senior unsecured notes due 2015 to CCC+ from B. BTEL guarantees the notes.
S&P lowered the rating because the rating agency expects BTEL's liquidity to come under considerable pressure in the next 7 months. 
Despite an increase in tariffs in September 2011, an improvement in the company's operating performance is likely to be lower than we expected in 2012. 
S&P believes this could further strain BTEL's ability to make its lease payments, which amount to about Rp700 billion each year. 
"We also anticipate that the company will not meet its interest coverage covenant for the year ended Dec. 31, 2011, on its local currency bonds. In addition, BTEL's weak operating performance makes it difficult for the company to raise funds to pay its local currency bonds of Rp650 billion that mature in September 2012.
"BTEL's operating performance for the quarter ended Dec. 31, 2011, is likely to have been weaker than our expectation for the previous 'B' rating," said Standard & Poor's credit analyst Mehul Sukkawala. "A higher-than-expected fall in voice and SMS traffic largely offsets the expected improvement from tariff hikes. We also expect the company's financial performance to be very weak in 2012."
'Weak' liquidity
S&P believes BTEL has 'weak' liquidity, as defined in our criteria. The company's liquidity sources are likely to cover liquidity uses by 0.6x in the next 12 months. We also expect that BTEL will breach its local currency bond covenant in two to three months.
"The negative outlook reflects our view that BTEL may not be able to undertake strategic measures by September 2012 to address its weak liquidity," said Mr. Sukkawala.
S&P could lower the rating if: (1) we expect the local currency bondholders to trigger acceleration of payment because of the covenant breach; or (2) BTEL does not raise additional funds by May 2012 to strengthen its liquidity position."We could revise the outlook to positive or raise the rating if BTEL arranges for adequate funds to meet both its upcoming rupiah-denominated bond repayment and its ongoing finance lease payments. This assumes that the company's EBITDA interest coverage is more than 1.5x and adequate headroom is restored within its debt facility financial covenants."
Disclosure: No position at the stock mentioned above.
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