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 (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 raise funds via the Sukuk Ijarah Programme for its parent, independent tower company Stealth Solutions Sdn Bhd (Stealth). Issue 1 is backed by 531 operational telco towers, lease payments from which 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 9.2 years (excluding options to renew). The towers’ tenancy ratio improved to 1.61x as at end-June 2022, up from 1.55x in 2021 and 1.50x in 2020. We view the increased tenancy ratio as positive, as this supports margin improvement through economies of scale. Revenue contribution from the top four telcos remained high at 85.4% in 1H2022; however, this is characteristic of the oligopolistic nature of the domestic telco industry and not considered as a major concern. We also assess non-renewal risk as low given that towers are mission-critical infrastructure for telcos; in addition, the high switching costs remains a deterrent factor.
Stealth leases the sites where 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 revenue growth and operating margin, we project a minimum finance service cover ratio at about 3.2x, above the covenanted 1.5x. This comfortable cash buffer against debt service partly stemmed from a large cash cushion from a portion of the sukuk proceeds. There could be a requirement in the future for capex, although there are no plans at this time. As of date, the outstanding under the sukuk stands at RM500 million.