Feb 9, 2012

Tower under review for downgrade

Moody's Investors Service has today placed the Ba2 corporate family rating of PT Tower Bersama Infrastructure Tbk (TBIG) under review for possible downgrade.
This follows the announcement made by PT Indosat Tbk (ISAT), rated Ba1 stable, that it has signed an agreement with TBIG for TBIG to purchase 2,500 of its telecommunications towers. The total upfront consideration is US$406 million of which approximately US$350 million will be paid in cash and the remainder will be in the form of newly issued shares in TBI equivalent to 5% of the enlarged equity base.
Indosat, as the anchor tenant, will lease back the towers from TBI for a period of 10 years at market rates. There is also the potential for a further earn out provision equivalent to some US$113 million over the life of the 10 year lease on the towers to be paid by TBIG to Indosat.
For TBIG the deal should further enhance its overall tenant quality and Moody's estimates that the Tier One tenancy ratio, being revenues attributable to Indosat, PT Telekomunikasi Indonesia (Baa1 stable), PT Telekomunikasi Sellular (Baa1 stable), and XL Axiata (Ba1 stable), will increase to approximately 70% from the current 64%.
In addition, TBIG will have the potential to build collocations on the 2,500 towers which will generate additional revenues.
The addition of these towers should catapult TBI into being the single largest independent tower provider in Indonesia, a position from which it should benefit given the growing number of collocations and increased acceptance of tower sharing by telecommunications operators in Indonesia.
Notwithstanding these benefits, Moody's will need to consider how TBIG plans on funding the acquisition as given the size of the deal there could be a substantial deterioration in leverage metrics.
This also represents the largest acquisition, in terms of number of towers, contemplated by TBI and Moody's will also consider its ability to integrate and successfully manage those assets as well as grow the tenancy ratio.
Given the high level of cash flow visibility surrounding the acquisition, the expected growth in collocations and associated ability to delever, it is Moody's view that any downgrade in TBIG's rating will be no more than one notch and, depending on the nature of funding, could be contained at the Ba2 rating level.
The acquisition is still subject to TBIG shareholder approvals as well as the consent of Indosat's creditors and could therefore be a period of months before financial close is reached.

Disclosure: No position at the stock mentioned above.

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