MARC Ratings has affirmed its ratings of MARC-1IS /AAIS on Cellco Capital Berhad’s (Cellco) RM520 million Issue 1 issued under its Islamic Commercial Papers/Islamic Medium-Term Notes Programme (Sukuk Ijarah) with a combined limit of up to RM1.0 billion. The ratings outlook is stable.
Cellco is a funding vehicle for its parent, Stealth Solutions Sdn Bhd, an independent tower company. Issue 1 is backed by 531 operational telco towers whose lease payments will meet the financial obligations under the sukuk.
The ratings reflect strong visibility and stability of cash flow backed by long-term lease agreements with major telco players, with an average remaining contract life of 8.2 years (excluding options to renew). Since the last review, the number of towers and tenants have grown to 547 and 914 as at end-June 2023 (end-June 2022: 543 towers and 876 tenancies), yielding a tenancy ratio of 1.7x, up from 1.6x previously. The increased tenancy ratio is seen as a positive as this supports margin improvement through economies of scale. Revenue contribution from the top four telcos remained high at 81% in 1H2023; however, this is characteristic of the oligopolistic nature of the domestic telco industry and not considered a major concern.
Non-renewal risk is considered low given that towers are mission-critical infrastructure for telcos; in addition, the high switching cost remains a deterrent factor. Stealth leases the sites on which its telco towers are located from third-party landowners. As the leases, typically on three-year terms, are shorter than the tower lease agreements, Stealth is exposed to the risk of the landowners not renewing the ground leases. This risk is largely mitigated by Stealth’s strong track record of lease renewals and no significant concentration in a single landowner.
Stable cash flow and a strong liquidity position provide ample covenant headroom. In MARC Ratings’ sensitised case that includes stresses to tenancy growth and operating margin, projected average and minimum finance service cover ratios of 3.0x and 2.3x provide comfortable buffer above the covenanted 1.5x.