OREANDA-NEWS. Fitch Ratings Indonesia has published National Long-Term Ratings of 'AAA(idn)' on PT XL Axiata Tbk's (XL; BBB/AAA(idn)/Stable) IDR5trn sukuk ijarah (sukuk) programme. The agency has also published the National Long-Term Rating of 'AAA(idn)' on the up to IDR1.5trn sukuk to be issued from the programme.

The sukuk rating is at the same level as XL's National Long-Term Rating of 'AAA(idn)' given the sukuk's structure. This reflects Fitch's view that default of these unsecured obligations would reflect default of the entity in accordance with Fitch's rating definitions. The rating also takes into account the sukuk's structure and documentation, which includes the following features:
- XL's obligations under the documentation rank pari passu with its other unsecured obligations;
- XL's commitment to irrevocably purchase the assets on maturity or the declaration of event of default by the trustee;
- The price payable is the aggregate of the outstanding face amount of the sukuk plus any accrued and unpaid periodic distribution amounts;
- On any periodic distribution date, XL will pay the sukuk holders rental due under the lease agreement for the sukuk assets, which is intended to be sufficient to fund the periodic distribution amounts payable by XL.

The transaction will be governed by Indonesian law. Fitch does not express an opinion on whether the relevant transaction documents are enforceable under the Indonesian law. However, Fitch considers XL's intentions to support its sukuk obligations. Fitch's rating for the certificates reflects the agency's belief that XL would stand behind its obligations. Furthermore, by assigning ratings to the programme and certificates to be issued under it, Fitch does not express an opinion on the programme structure's compliance with sharia principles.

'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

Axiata's Support: XL's 'BBB' rating is closely aligned with its 66.5% parent Axiata Group Berhad's (Axiata) credit strength. Fitch uses the top-down method in assessing XL, using Axiata as a basis, to reflect XL's strategic and financial importance to its parent. XL is Axiata's fastest-growing subsidiary and it accounted for 33% of Axiata's revenue and EBITDA in 1H15.

Leverage to Improve: Fitch expects XL's funds flow from operations (FFO)-adjusted net leverage to strengthen to around 3.2x in 2015 (2014: 4.0x). We believe cost synergies and revenue opportunities post-integration of PT Axis Telekom, and XL's transformation strategy will drive earnings recovery in the longer term. Potential monetisation of XL's remaining 6,500 towers could serve as a catalyst for further deleveraging in the next two years.

Flat Revenue for 2015: We expect XL revenue to be flat in 2015, in line with management's forecast. Operating EBITDAR margin is likely to stay around 40% during 2015-2016 (2014: 39.7%), as cost synergies offset the cannibalisation of traditional voice and messaging services by lower-margin data services.

Negative FCF in 2015: FFO for 2015 is likely to be just sufficient to meet XL's annual capex budget of IDR6.5trn (2014: IDR7.1trn), which will go into network expansion of 3G and optical fibre backhaul. We believe free cash flow (FCF) may turn positive in 2016 on capex savings and earnings recovery. Our forecast assumes a dividend payout of 30%, in line with historical trends.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Revenue flat for 2015, and to grow by mid-single-digits in 2016-2017;
- EBITDAR margin of around 40% in 2015-2017;
- Annual capex of around IDR6.5trn in 2015-2017;
- Dividend payment in line with its minimum payout policy of 30%.

RATING SENSITIVITIES

The programme and issuance ratings are at the highest level on the National Ratings scale and therefore cannot be upgraded.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Any weakening in linkages with Axiata
- A downgrade of Fitch's credit view of Axiata

LIQUIDITY

Adequate Liquidity: XL's IDR5.5trn cash balance as of end-June 2015 would be enough to cover its short-term debt maturities of IDR4.0trn. Liquidity is also strengthened by XL's strong access to local banks and capital markets. Out of a total on-balance sheet debt of IDR29.2trn, 70% is denominated in US dollars, which includes a USD500m shareholder loan from Axiata.