OREANDA-NEWS. Fitch Ratings has published PT Indonesia Infrastructure Finance's (IIF) National Long-Term Rating at 'AAA(idn)'. The Outlook is Stable.

'AAA(idn)' National Ratings denote the highest rating assigned by the agency in its National Rating scale for Indonesia. 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.

Fitch has classified IIF as a credit-linked public-sector entity as it has an important role in the development of Indonesia's infrastructure. The rating reflects IIF's strategic importance, strong public-sector and supranational owners, and tight monitoring by the Ministry of Finance.

KEY RATING DRIVERS
Strong 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 which is 100% owned by the government of Indonesia. Other public sector shareholders include the Asian Development Bank (AAA/Stable) and the International Finance Corporation, which each hold 19.99%, and Deutsche Investitions- und Entwicklungsgesellschaft with 15.1%. The only non-public sector owner is Sumitomo Mitsui Banking Corporation (A/Stable) with a 14.9% stake. Fitch has used a weighted average rating of the public-sector shareholders to assess IIF's rating given their strong commitment of support.

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 investors for infrastructure projects under public-private partnership schemes. Infrastructure improvement is a high strategic priority for the government.

Tight Control: There are eight members on IIF's board of commissioners, comprising one member from each shareholder group, two representatives from the Ministry of Finance and two independent commissioners. The board of commissioners and board of directors of IIF meet regularly, through which the commissioners supervise management of IIF. The directors require approval from the board of commissioners if a project costs more than a set level.

Improving Financial Performance: IIF's main source of revenue is interest income from lending activities. Income from loans rose to IDR110.6bn in 2014 from IDR17.5bn in 2013, the first year IIF received income from lending. IIF expects interest income to increase to IDR832bn by 2019 as the portfolio grows. The company also receives interest income from investments in term deposits and bonds made with its large holdings of funds that have not been lent out. This income rose to IDR138bn in 2014 from IDR71bn in 2013.

Demand for Infrastructure Financing Rising: IIF disbursed IDR1.6trn of loans in 2014 compared with IDR990bn in 2013. In addition, loans approved and not drawn amounted to IDR2.5trn and these are likely to be drawn in 2015. The loan mix is skewed towards electricity, telecoms, airport hangars and transportation. Loans to other mandated sub-sectors (such as roads and drinking water) are likely increase in the medium term. Close to 48% of the total loan portfolio at end-2014 was in US dollars, reflecting the demand for foreign-currency loans for infrastructure projects.

Increasing Leverage: IIF was granted a USD250m loan facility from a syndication of banks and International Finance Corporation in 2014. In addition, IIF's subordinated loan of USD200m will be fully drawn by end-2015. The subordinated loans have been provided to IIF, via the government and SMI, from the Asian Development Bank and World Bank. IIF must limit leverage to 10x equity, although management has said it will limit future borrowings to 3x capitalisation (equity plus subordinated debt).

RATING SENSITIVITIES
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, would trigger a rating downgrade.