MARC has assigned preliminary ratings of MARC-1IS/AAIS to Cellco Capital Bhd’s (Cellco) proposed 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 set up to undertake the Sukuk Ijarah Programme for its parent, Stealth Solutions Sdn Bhd (Stealth), an independent tower company and the originator of this transaction. It will purchase 531 completed telecommunication (telco) towers from Stealth using the proceeds of the issuance and concurrently lease the towers back to its parent.
The assigned ratings reflect Stealth’s strong cash flow visibility backed by long-term lease agreements with key domestic telco players, low counterparty risk of telco players, and the growing demand for telco towers. The ratings also factor in the absence of construction risk given the telco towers are revenue-generating with a locked-in revenue of approximately RM48 million p.a. Termination risk of the lease agreements is mitigated by the non-cancellable lease terms; non-renewal risk is deemed low given that the towers remain critical infrastructure for telco players. The stable outlook reflects MARC’s expectations of stable operating performance, underpinned by timely lease payments, and the projected average post-distribution finance service cover ratio (FSCR) being maintained above 2.0x.
The low counterparty risk is premised on the creditworthiness of the three largest Malaysian telco players, namely Maxis Berhad, Celcom (Malaysia) Berhad and Digi Telecommunications Berhad which currently accounted for about 56% of Stealth’s rental income. Concentration risk is deemed manageable, factoring in the longstanding relationships with the telco players and the high switching costs. Rental payments have also been prompt, with the average receivable days of about 23 days in 2020 (annualised basis) against credit terms of 30 days.
The initial issuance of RM520 million will be backed by lease payments which will be captured into the designated accounts. The relatively stable tower business model provides Stealth with revenue visibility and the capacity to generate a strong earnings before interest, tax, depreciation and amortisation (EBITDA) margin, which stood at 42% in 2019. The average remaining contract life stood at about six years as at end-November 2020 (excluding options to renew); lower lease payments on contract renewals are expected to be offset by an increase in the tenancy ratio from 1.5x from additional tenants or co-locations.
The rating agency also notes that the telco towers are on land sites which typically have three-year lease terms, shorter than the tower lease agreements. Risk of operational disruption through non-renewal of land leases is largely mitigated by the company’s healthy track record and by the fact that it has no significant concentration to a single landowner.
Cellco projects a strong liquidity position with ample covenant headroom. MARC’s sensitised case has assumed a low single-digit y-o-y tenancy growth and an increase in operating expenses. Under this scenario, average and minimum FSCRs are projected at about 7.4x and 4.7x, well above the minimum covenanted 1.5x. While the strong FSCRs are attributable in part to a large cash cushion from a portion of the sukuk proceeds, there is a likelihood that a substantial portion would be utilised by its parent for capex and working capital requirements.