MARC has affirmed its ratings of MARC-1_IS /AA_IS to Cellco Capital Bhd’s (Cellco) RM520 million issuance (Issue 1) under its Islamic Commercial Papers/Islamic Medium-Term Notes (Sukuk Ijarah Programme) with a combined limit of up to RM1.0 billion. The ratings outlook is stable.

Cellco is a special-purpose entity that was set up to raise funds via the Sukuk Ijarah Programme for its parent, Stealth Solutions Sdn Bhd (Stealth), an independent tower company. In exchange, Stealth injected its 531 operational telco towers to Cellco, lease payments from which will meet the financial obligations under the sukuk.

The rating affirmation is mainly driven by Cellco’s strong cash flow visibility with a locked-in contracted revenue of about RM48 million p.a. from the lease payments. The weighted-average contract maturity of around eight years (excluding options to renew) provides stability of income stream over the long term. We consider renewal risk to be low, and client concentration risk to be manageable considering the creditworthiness of the counterparties – Maxis Berhad, Celcom (Malaysia) Berhad, Digi Telecommunications Berhad and U Mobile Sdn Bhd – and the long-standing relationships with the telcos of at least ten years. The four telcos make up about 90% of rental income in 1H2021.

Though embedded in the tower lease agreements are lower rentals on contract renewals, we believe Cellco’s cash flow would be bolstered by new leasing opportunities given favourable tower industry dynamics. 5G investments, commonness of infrastructure sharing, and telcos’ asset-light strategies are likely to fuel growth for the independent towers leasing industry. As at end-June 2021, tenancy ratio of the 531 towers remained stable at 1.51x (2020: 1.50x).

We note that Stealth’s telco towers are on land sites typically on three-year lease terms, shorter than the tower lease agreement. Inability to renew land leases thus could affect operations, but we believe this risk is largely mitigated by the company’s track record of extending existing leases and the fact that it has no significant concentration to a single landowner.

In terms of cash flow, Cellco projects a strong liquidity position with ample covenant headroom. Under our sensitised case of a low 1% y-o-y tenancy growth and a 20% increase in operating expenses, average and minimum finance service cover ratios (FSCR) are projected at about 5.5x and 3.1x, well above the minimum covenanted 1.5x. The strong FSCRs are attributable in part to a large cash cushion from a portion of the sukuk proceeds, but there is a likelihood that a substantial portion would be utilised by parent Stealth for capex and working capital requirements.

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