OREANDA-NEWS. March 30, 2015. Fitch Ratings has affirmed PT Indosat Tbk's (Indosat) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB'. The agency has also affirmed the Indonesia-based company's National Long-Term Rating at 'AAA(idn)'. The Outlook is Stable on the IDR and the National Long-Term Rating.

Fitch has also affirmed the foreign-currency senior unsecured rating of 'BBB' and the National Long-Term Ratings on its IDR9trn bond programme and IDR1trn sukuk ijarah programme at 'AAA(idn)'.

'AAA' National 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

Parent's Support: Indosat's 'BBB' IDR incorporates a three-notch uplift from its stand-alone credit profile of 'BB' based on its strategic and financial linkages with its 65% parent, Ooredoo Q.S.C (Ooredoo; A+/Stable). Ooredoo's bond and loan documents contain a cross-default clause covering significant subsidiaries, including Indosat. Indosat is one of Ooredoo's largest and fastest-growing subsidiaries, accounting for about 22% of Ooredoo's group revenue, 25% of EBITDA and 25% of capex in 2014.

Stand-alone 'BB': Indosat's stand-alone credit profile of 'BB' is based on its second-largest market position with a 20% revenue market share, operating EBITDAR margin of over 40% and a moderate 2014 funds flow from operations (FFO)-adjusted net leverage of 2.4x. We believe that Indosat will generate positive free cash flow (FCF) margin of 2%-3% during 2015-17 as capex will trend down once it completes its network modernisation by end-2015.

Lower Profitability: We believe that Indosat's 2015-16 operating EBITDAR margin will deteriorate towards 40% (2014: 42.5%) mainly due to intense competition in the data segment and higher marketing costs. A decline in profitability is also due to a change in the revenue mix as lower-margin data services substitute more profitable voice and text services. We estimated data's EBITDA margin is around 15%-20% - much lower than traditional voice and text's profitability of over 40%.

Exposure to Rupiah Depreciation: Indosat is exposed to rupiah depreciation as 46% of its IDR25.5trn debt is in US dollars, of which around 56% is hedged through forward contracts. It also pays about USD40m-45m in tower lease rentals denominated in US dollars, which further exposes its EBITDA to currency risk. We estimate that a 15% further depreciation in IDR will add about 0.3x to Indosat's leverage.

We believe that Indosat is likely to refinance its USD650m of notes originally due 2020 through a rupiah-deominated bond during 2015 to lower its US dollar exposure. At end-September 2014, the average debt maturity is comfortable at 4.3 years.

Positive FCF: We forecast that Indosat will generate at least 2%-3% in FCF margin from 2015 as its cash flow from operations of IDR8trn will be sufficient to fund its capex of IDR7trn and dividends of around IDR200bn-300bn. The ratio of capex to revenue for 2015-16 will trend down to around 28%-30% (2014: 33%) as it completes its network modernisation. During 2014, Indosat tripled its 3G sites to 15,962 (2013: 5,409) and caught up with XL's 16,000 and Telkom's 30,000 3G sites.

We believe that Indosat's strategy to roll out 3G technology using two spectrum bandwidths of 900MHz and 2100MHz will bring capex savings relative to competitors, which are using mostly 2100MHz.

Smaller Telcos to Exit: We believe that the industry will further consolidate in 2015 as intense data competition will force smaller, unprofitable telcos to consider exiting the market, reducing the industry participants to four from six, and bring more stability to data tariffs. During 2014, PT Smartfren Telecom Tbk (CCC(idn)) emerged as the sole code division multiple access (CDMA) operator as PT Telekomunikasi Indonesia Tbk's (BBB-/Stable) Flexi division and PT Bakrie Telecom Tbk closed their struggling CDMA operations.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Revenue to grow by low single-digit percentage in 2015 driven by data services.

- Operating EBITDAR margin to decline to 40% due to data-led substitution of more profitable voice and text services and depressed data tariffs. (Please refer to "2015 Outlook: Indonesian Telecommunications Services", dated 11 November 2014 for details on Fitch's view on the industry.)

- Positive FCF margin of 2%-3% starting 2015 as capex/revenue will trend down to 28%-30%.

- Effective interest rate to increase to 8.5%-9% over the Fitch base case as Indosat replaces its lower-cost US dollar debt through rupiah debt.

RATING SENSITIVITIES

Positive: Fitch expects no positive rating action as the company's FFO-adjusted net leverage is likely to remain above 2.0x in the medium term.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Any weakening of the links between Indosat and Ooredoo
- FFO-adjusted net leverage rising above 3.0x on a sustained basis.

The ratings on the following instruments were affirmed:
Indosat Palapa Co BV's 7.375% USD650m notes due 2020, guaranteed by Indosat, at 'BBB'.
Indosat's 8.625% IDR1.2trn bond due 2019 at 'AAA(idn)'
Indosat's 8.875% IDR1.5trn bond due 2022 at 'AAA(idn)'
Indosat's 8.625% IDR300bn sukuk ijarah due 2019 at 'AAA(idn)'
Indosat's 10% IDR950bn bond due 2017 at 'AAA(idn)'
Indosat's 10.3% IDR750bn bond due 2019 at 'AAA(idn)'
Indosat's 10.5% IDR250bn bond due 2021 at 'AAA(idn)'
Indosat's 10.7% IDR360bn bond due 2024 at 'AAA(idn)'
Indosat's 10% IDR64bn sukuk due 2017 at 'AAA(idn)'
Indosat's 10.3% IDR16bn sukuk due 2019 at 'AAA(idn)'
Indosat's 10.5% IDR110bn sukuk due 2021 at 'AAA(idn)'