Fitch Affirms Smartfren at 'CCC(idn)'
'CCC' National Ratings denote that default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favourable business or economic conditions.
KEY RATING DRIVERS
Gradual Migration to LTE: Smartfren plans to gradually migrate its subscribers from Code Division Multiple Access (CDMA) to Long-Term Evolution (LTE) technology. As the company gradually rolls-out LTE service, its annual capex will increase to above IDR2.2trn (USD157m) in 2016 and 2017 from IDR1.7trn (USD121m) in 2014.
Fitch believes that successful return on the company's LTE investment will depend on its ability to significantly increase subscribers above its level of 11 million. This will be a challenge given the historically modest subscriber growth and price-competitive nature of the Indonesian telecom industry.
Capex Largely Financed: Smartfren has secured a USD300m loan from China Development Bank (CDB) and USD180m in vendor financing from Nokia for its network expansion. Additionally, the company is in the process of obtaining another USD300m loan from CDB to purchase LTE-compatible handsets. We believe that these facilities will cover the company's planned capex in 2016 and 2017.
Minimal EBITDA Generation: We expect Smartfren to generate positive EBITDA of around IDR200bn-300bn in 2015 (2014: IDR230bn), however we think that this will remain insufficient to cover its interest payment, working capital and capex needs in 2015.
Inadequate Liquidity: Smartfren plans to cover the cash shortfall in 2015 by issuing mandatory convertible bonds (MCB). The company still has not utilised IDR3trn (USD214m) of its IDR9trn MCB series II. Fitch does not give credit for future MCB injections despite its successful issuances in the past. This is due to the uncertainty that stems from Smartfren's low equity value and the inability to assess the willingness and ability of the MCB investors to continue funding the company.
Competition to Stabilise: We believe that competition could stabilise as smaller and weaker telcos are now focusing on profitability rather than market share. The industry could further consolidate as smaller unprofitable telcos, including PT Hutchison 3 Indonesia, may seek M&A due to a combination of depressed data tariffs and significant investment needed for LTE roll-out. However, competition may rebound in 2016 as the three largest telcos may offer cheaper LTE data tariffs to boost market share.
Fitch's key assumptions within our rating case for the issuer include:
- Subscriber base to increase modestly to 12 million in 2015
- Blended average revenue per user of IDR22,000 in 2015
- Capex progresses in line with management assumptions
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-The company's ability to fund its operations without any reliance on further issuance of mandatory convertible bonds
Negative: Future developments that may, individually or collectively, lead to negative rating include:
- Liquidity or operating performance deteriorates such that the company appears unlikely to be able to meet obligations