Mar 21, 2012

S&P puts Bakrie Telecom on credit watch


Standard & Poor's Ratings Services (S&P) said today that it had placed its CCC+ long-term corporate credit rating on Indonesia-based limited mobility wireless operator PT Bakrie Telecom Tbk. (BTEL) on CreditWatch with developing implications. 
S&P also placed our 'CCC+' issue rating on senior unsecured notes due 2015 issued by Bakrie Telecom Pte. Ltd. on CreditWatch with developing implications. BTEL guarantees the notes.
"The CreditWatch placement reflects the criticality of BTEL's recently announced fundraising plan to the company's credit profile," said Standard & Poor's credit analyst Mehul Sukkawala. 
"The success of the plan is uncertain, in our view. The proposal could improve BTEL's liquidity and covenant headroom. We expect the ratio of sources of liquidity to uses of liquidity for 2012 to rise to 1.2x from our earlier expectation of 0.5x. Nevertheless, BTEL's liquidity is likely to come under considerable pressure if the plan fails."
Bakrie Telecom plans to raise US$70 million through the issuance of non-preemptive rights and US$50 million through a bank loan to prepay Rp650 billion of local currency bonds maturing in September 2012 and fund capital expenditure of US$50 million-US$70 million in 2012. Nevertheless, the company 
has not yet received shareholders' approval for the non-preemptive rights issue. 
The acquirer of preemptive rights is not known yet and BTEL is still negotiating with banks for the loan. Moreover, the fundraising is likely to be completed only by June 2012.
BTEL's financial metrics are likely to improve if the proposed issuance of non-preemptive rights goes ahead as planned. The company's ratio of adjusted debt (including equipment payables) to EBITDA will improve to about 4.8x in 2012 from our earlier expectation of more than 5x. The ratio of funds from operations 
(FFO) to adjusted debt will rise to about 8.5% from our earlier estimate of about 6%. Nevertheless, the company's financial metrics will remain highly leveraged.
"We believe BTEL has "weak" liquidity, as defined in our criteria. The company's liquidity sources are likely to cover liquidity uses by 0.5x in the next 12 months. We also expect that BTEL will breach its local currency bond covenants in one to two months.
"BTEL's liquidity would improve if the proposed transaction is successfully completed," said Sukkawala. "The company's liquidity sources would then cover liquidity uses by about 1.2x in 2012 and 1x in 2013. These ratios will also provide the company flexibility in managing the covenant."
S&P aims to resolve the CreditWatch placement when we have clarity on the outcome of the fundraising proposal.
The rating agency could raise the rating by one notch if the company: (1) raises funds as it proposes and meets the bond maturity and capital expenditure; and (2) addresses the expected covenant breach on the local currency bond.
S&P could lower the rating if we believe the company is not able to take forward its fundraising plan or put in place an alternative mechanism to meet its upcoming debt maturity.
Sampoerna Telekomunikasi tie-up
"We do not expect a proposed strategic tie-up between BTEL and PT Sampoerna Telekomunikasi Indonesia (STI; unrated) to materially improve BTEL's competitive position in the next 12 months. This is because STI is a very small player in  the Indonesian telecom market. We, however, expect BTEL to benefit from the STI  deal in the next two to three years. 
Access to 7.5 megahertz (MHz) frequency in STI's 450 MHz band and to STI's rural network would help BTEL grow its broadband and voice business. BTEL would also benefit from efficiency through measures 
such as shared marketing and infrastructure maintenance.


Disclosure: No position at the stock mentioned above. 

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