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Fitch Upgrades Indosat Ooredoo’s Local-Currency IDR to ‘BBB+’; Affirms ‘BBB’ FC IDR


SINGAPORE, March 22 (Fitch) This Rating Action Commentary updates the version published on 15 March 2016, to include Fitch Ratings’ Cross-Sector Criteria on Rating Sukuk. Fitch Ratings has upgraded the Long-Term Local-Currency Issuer Default Rating (LC IDR) of Indonesia’s second-largest telecommunications operator, PT Indosat Tbk (Indosat Ooredoo), to ‘BBB+’ from ‘BBB’.

The agency has simultaneously affirmed Indosat Ooredoo’s Long-Term Foreign-Currency IDR (FC IDR) and its foreign-currency senior unsecured rating at ‘BBB’. Fitch has also affirmed the National Long-Term Rating at ‘AAA(idn)’. The Outlook on the ratings is Stable. A full list of rating actions is at the end of this rating action commentary.

AAA’ National Ratings denote the highest rating assigned by Fitch on its national rating scale for that country. This rating is assigned to issuers or obligations with the lowest expectation of default risk relative to all other issuers or obligations in the same country.

The upgrade of the LC IDR follows Indosat Ooredoo’s improved standalone credit profile and Fitch continues to incorporate a three-notch uplift to reflect its strong ties with its 65%-parent, Qatar-based Ooredoo Q.S.C. (Ooredoo, A+/Stable). However, the FC IDR remains at ‘BBB’ as it continues to be capped at Indonesia’s Country Ceiling, reflecting the additional risks associated with transfer and convertibility of foreign currency.


Ooredoo’s Support Drives Ratings: Indosat Ooredoo’s IDRs are underpinned by the strong legal and strategic linkages with Ooredoo. Ooredoo’s bond and loan documents contain a cross-default clause covering significant subsidiaries, including Indosat Ooredoo.

The Indonesian telco is one of Ooredoo’s largest subsidiaries, accounting for 22% and 25% of Ooredoo’s 2015 revenue and EBITDA, respectively. Its recent rebranding to “Indosat Ooredoo” underscores the reputational risk to the parent. Standalone Profile Raised to ‘BB+’: Indosat Ooredoo’s improved standalone credit profile reflects our expectation of continued deleveraging and slowing capex intensity.

We believe the company’s funds flow from operations (FFO)-adjusted net leverage will decline to around 2.0x in 2016 and 2017 (2014: 2.7x), as capex/revenue reduces to 26%-28% (2014: 33%) following the completion of its network modernisation. Margin Dilution: Fitch sees ongoing pressure on margin as the proportion of lower-margin data services grows in its revenue mix.

However, stabilising competition is likely to support Indosat Ooredoo’s operating EBITDAR margin at around 42% in 2016 and 2017 (2014: 43.5%). Our forecast assumes mid-single digit revenue growth, driven by mobile data revenues.

Positive Free Cash Flows: Indosat Ooredoo’s cash flow from operations of around IDR8trn in 2016 is likely to be sufficient to cover cash capex. We expect capex to stabilise at around IDR7.0trn-8.0trn, driven by the expansion of its Long-Term Evolution (LTE) network following the completion of 1800MHz spectrum reassignment for 4G services.

Management has indicated that its network is 4G ready and expects to incur only incremental capex to upgrade its current system to 4G. Exposure to Rupiah Depreciation: Indosat Ooredoo is vulnerable to depreciation in the rupiah, as 33%, or USD506m, of its debt excluding finance leases are US dollar-denominated. The proportion of US dollar-denominated debt has fallen from 57% at the end of March 2015, and we see scope for further reduction, in light of its plans to sell towers to pare dollar-denominated debt.

Indosat Ooredoo has hedged 85% of its US dollar exposure through foreign exchange forward swaps. LIQUIDITY Liquidity Adequate: As at end-September 2015 Indosat Ooredoo had cash of IDR3.7trn and undrawn credit facilities of IDR3trn, which are are sufficient to meet maturities of around IDR4.8trn falling due over the next 12 months.

In addition, we believe the company has good access to the capital markets and local banks, strengthened by the implied support from Ooredoo. The average tenor of the debt is 3.1 years.


Fitch’s key assumptions within the rating case for Indosat Ooredoo include: – Revenue to grow at 11% in 2015, and to grow by mid-single-digits in 2016-2017; – Competition to stabilise as smaller telcos shift emphasis towards profitability and away from market share; – Operating EBITDAR margin of around 42% in 2016-2017; – Annual cash capex/revenue ratio to fall to 26%-28% in 2016 and 2017; – No material debt-funded M&A plans; and – Dividend payments to resume in 2017 at 50% payout on normalised net profit.

RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: – Indosat Ooredoo’s Local-Currency Issuer Default Rating (LC IDR) could be upgraded if FFO-adjusted net leverage falls below 1.5x, and both free cash flows and net income are positive on a sustained basis.

– Indosat Ooredoo’s Foreign-Currency IDR (FC IDR) could be upgraded if there is a positive rating action on Indonesia’s Country Ceiling. Negative: Future developments that may, individually or collectively, lead to negative rating action include: – Indosat Ooredoo’s LC IDR could be lowered if FFO-adjusted net leverage rises above 3.0x on a sustained basis or if there is any weakening of the links between Indosat Ooredoo and Ooredoo. – A negative rating action on Indonesia’s Country Ceiling will result in a corresponding action on Indosat Ooredoo’s FC IDR.

FULL LIST OF RATING ACTIONS PT Indosat Tbk – Long-Term Local-Currency IDR upgraded to ‘BBB+’ from ‘BBB’; Outlook Stable – Long-Term Foreign-Currency IDR affirmed at ‘BBB’; Outlook Stable – Foreign-Currency senior unsecured rating affirmed at ‘BBB’ – National Long-Term Rating affirmed at ‘AAA(idn)’; Outlook Stable The ratings on the following instruments were affirmed: – Rupiah-denominated senior unsecured bonds at ‘AAA(idn)’ – Rupiah-denominated sukuk at ‘AAA(idn)’ – IDR9trn bond programme and issues under the programme at ‘AAA(idn)’ – IDR1trn sukuk ijarah programme and issues under the programme at ‘AAA(idn)’.


Primary Analyst Janice Chong (International ratings) Director +65 6796 7241 Fitch Ratings Singapore Pte Ltd 6 Temasek Boulevard #35-05 Suntec City Tower 4 Singapore 038986

Olly Prayudi (National ratings) Associate Director +62 21 29026412 Fitch Ratings Indonesia Prudential Tower 20th Floor Jl. Jend. Sudirman Kav.79 Jakarta 12910

Secondary Analyst Nitin Soni (International ratings) Director +65 6796 7235

Committee Chairperson Steve Durose Managing Director +61 2 8256 0307

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Fitch Upgrades Indosat Ooredoo’s Local-Currency IDR to ‘BBB+’; Affirms ‘BBB’ FC IDR

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