OREANDA-NEWS. Fitch Ratings Indonesia has published the 'AAA(idn)' ratings on PT Indonesia Infrastructure Finance's (IIF) rupiah senior unsecured bonds of up to IDR2trn with maturities of up to seven years.

The proposed bonds are rated at the same level as IIF's National senior unsecured rating of AAA(idn) as the bonds constitute senior unsecured obligations of the company. IIF will use the proceeds of the bond issue for corporate activities.

'AAA(idn)' National Long-Term 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.

KEY RATING DRIVERS

Strong Support from Shareholders: IIF has five shareholders, including PT Sarana Multi Infrastruktur (Persero) (SMI, BBB-/AA+(idn)/Stable), which is the largest shareholder with a 30% stake and is 100% owned by the government of Indonesia. Other public-sector shareholders include the Asian Development Bank (AAA/Stable) and the International Finance Corporation (AAA/Stable), each with 19.99% ownership, and Deutsche Investitions - und Entwicklungsgesellschaft (AAA/Stable) with 15.1%. The only non-public-sector owner is Sumitomo Mitsui Banking Corporation (A/Negative) with a 14.9% stake.

Strategically Important Entity: Fitch believes that IIF is an important tool established by the Indonesian government and the other public-sector shareholders to assist in the development of infrastructure within Indonesia. The entity provides financing to infrastructure projects under public-private partnership schemes. Infrastructure improvement is a high strategic priority for the government.

Tight Control: There are 10 members on IIF's board of commissioners, comprising one member from each shareholder group, two representatives from the Ministry of Finance and three independent commissioners. The board of commissioners and board of directors of IIF meet regularly, through which the commissioners supervise management of IIF. In the process of evaluating a project, IIF implements a two-tier control where if a lending amount is above a set level or the investment instrument is of a certain nature, it requires approval from the boards of directors and commissioners. Furthermore, to avoid being the sole financier of a project, IIF collaborates with banks and other financial institutions in project financing.

Improving Financial Performance: Total revenue reached IDR306.3bn in FY15, from IDR291.8bn in FY14 after income from investment and lending rose to IDR3.3trn in 2015 from IDR1.6trn in 2014. Fitch expects IIF's total revenue to increase to IDR667.6bn in FY16 as its loan portfolio expanded over the FY14-FY16 forecast period. IIF's total revenue mainly consists of income from investment and lending.

Sector Concentration: Although IIF has reported zero non-performing loans by FYE15, Fitch believes that the downside risks for IIF in a difficult environment, characterised by a sharp GDP decline, could be quite pronounced given its concentration in the infrastructure sector.

Modest Leverage: IIF was granted a USD250m loan facility from a syndicate of banks led by the IFC in FY14 and was granted an additional loan facility of USD150m in FY16. In addition, IIF received a subordinated loan of USD200m from the World Bank and ADB via the government of Indonesia and SMI, which was fully drawn in FY15. IIF has an internal limit to contain leverage at 10x equity, although management has said it will limit future borrowings to 3x capitalisation.

RATING SENSITIVITIES

The rating on IIF's bonds is sensitive to changes to the company's senior unsecured rating, which will move in line with changes in IIF's National Long-Term Rating.

Developments that may, individually or collectively, lead to negative rating action on the National Long-Term include any negative changes to IIF's governance, which may be seen in the reduction of public-sector ownership to below 50% (presently 85%), or a reduction in the Indonesian Ministry of Finance's influence on IIF's board of commissioners.