Credit Opinion dari Moody Investors Service
Credit Opinion: Indosat Tbk. (P.T.)
Global Credit Research - 13 Feb 2015
Jakarta, Indonesia
Ratings
Category
Outlook
Corporate Family Rating -Dom Curr
Issuer Rating -Dom Curr
Moody's Rating
Stable
Ba1
Ba1
Indosat Palapa Company B.V.
Outlook
Bkd Senior Unsecured
Stable
Ba1
Contacts
Analyst
Nidhi Dhruv/Singapore
Annalisa Di Chiara/Hong Kong
Laura Acres/Hong Kong
Phone
65.6398.8315
852.3758.1537
852.3758.1310
Key Indicators
[1]Indosat Tbk. (P.T.)
Scale (USD Billion)
EBITDA Margin
Debt / EBITDA
FCF / Debt
RCF / Debt
(FFO + Interest Expense) / Interest Expense
(EBITDA - Capex) / Interest Expense
9/30/2014(L) 12/31/2013 12/31/2012 12/31/2011 12/31/2010
$2.0
$2.3
$2.4
$2.3
$2.2
48.2%
49.5%
52.9%
52.6%
54.5%
2.8x
2.9x
2.6x
2.7x
2.7x
0.1%
-3.2%
2.4%
3.1%
-1.5%
23.6%
24.3%
26.2%
26.4%
24.7%
4.3x
5.0x
5.1x
5.0x
4.3x
1.8x
0.7x
2.5x
2.0x
1.5x
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for NonFinancial Corporations. Source: Moody's Financial Metrics
Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide.
Opinion
Rating Drivers
- One of the leading mobile operators in Indonesia
- Operating environment remains competitive
- Recent weakness in operating and financial profile can be accommodated
- Adequate liquidity and covenant headroom
- Strong shareholder provides rating uplift
Corporate Profile
Headquartered in Jakarta, Indonesia, PT Indosat Tbk is a fully-integrated telecommunications network and
services provider. It provides multimedia, data communications and internet services and is also a leading
provider of international call services. With gross revenues of IDR23.8 trillion (approximately US$2.0 billion) for the
last 12 months ended September 2014, Indosat is the country's third largest cellular operator by revenue.
Indosat is 65% owned by Ooredoo Q.S.C. (previously known as Qatar Telecom) ("Ooredoo", A2 negative) which
is, in turn, 55%-owned by the Qatar Government (Aa2 stable).
SUMMARY RATING RATIONALE
Indosat's Ba1 corporate family rating combines:
1. The company's standalone credit strength which reflects Indosat's established market position, the expectation
of moderate growth in the cellular market and an improving macro-environment. However, ongoing competition,
especially in the 3G and data space, will continue to exert pressure on Indosat's margins, although we expect
margins to remain high for the rating level. Furthermore, exposure to regulatory uncertainties and emerging market
risks constrain the rating.
2. The credit support that Moody's believes Ooredoo is likely to provide in a situation of distress.
Moody's considers Indosat as a strategic investment for Ooredoo as (1) Indosat is majority owned by Ooredoo,
(2) Indosat is Ooredoo's largest non-domestic business, representing approximately 22% of gross revenue and
24% of reported EBITDA for the nine months ended September 2014 and (3) the existence of cross-default
provisions between Ooredoo's debt and Indosat's debt.
Indosat's final rating of Ba1 benefits from a one-notch uplift due to such expected support from Ooredoo.
DETAILED RATING CONSIDERATIONS
ESTABLISHED POSITION IN A GROWING MARKET AND INTEGRATED BUSINESS MODEL UNDERPIN
RATING
Indosat is the third largest cellular operator in Indonesia in terms of revenue and subscribers. As of September
2014, Indosat had 21% revenue market share and 21% subscriber market share with 54.2 million subscribers . In
comparison, its peer, PT Telekomunikasi Selular Tbk (Telkomsel, Baa1 stable) dominates the market with 139.4
million subscribers while XL Axiata (Ba1 stable) had 58.3 million subscribers over the same period.
As measured by base transceiver stations ("BTS"), Indosat has the third largest mobile network in Indonesia (after
Telkomsel and XL), with 37,382 BTS as of September 2014. Approximately, one-third of Indosat's BTS are outside
Java which should allow it to capitalize on growth opportunities in these under-penetrated markets.
Currently, Indosat has the largest allocation of 10MHz of the 900MHz spectrum; however its allocation of 3G
spectrum (2100 MHz) of 10MHz is lower than XL and Telkomsel, both of which have 15MHz in this bandwidth. In
September 2012, Indosat reallocated part of its existing 10MHz of 900 MHz spectrum for 3G services, thus
adopting a different strategy for its 3G network expansion.
Indosat has lagged its peers on 3G network coverage owing to its late start. However, we expect the company to
continue to invest heavily in its 3G capacity and coverage over the next one to two years, which should enable it
to remain competitive against its closest competitor, XL, which finds itself in a position of strength post acquisition
of Axis.
At the same time, Indosat continues to execute on its network modernization strategy enhancing service quality
and coverage.
Indosat provides a full range of services across fixed-line and cellular networks, however, as of September 2014,
its cellular business generated 80.7% of revenues, data and fixed-broadband 14.6%, and fixed-voice services
5.3%. Cellular and fixed voice revenues declined 1.3% and 6.0% year-on-year. This was partially offset by fixed
data revenues increasing by 6.6%.
Going forward, we expect revenue growth in the saturated voice and SMS segment to slow to about 5%-6%, but
Going forward, we expect revenue growth in the saturated voice and SMS segment to slow to about 5%-6%, but
which should be partially compensated by growth in data services revenues of 10%-15%.
RECENT WEAKNESS IN OPERATING AND FINANCIAL PERFORMANCE CAN BE ACCOMODATED
For the nine months ended September 2014, Indosat's results were weaker than expected but can be
accommodated within its Ba1 rating with a stable outlook.
Reported revenue declined slightly by 0.5% year-on-year (YoY) to IDR17.8 trillion, with declines in voice, SMS and
interconnection fees offsetting strong revenue growth in data and value added services. Indosat also recorded a
modest 0.8% YoY growth in mobile subscribers. However, blended average revenue per user declined to
IDR26,900 from 27,500. Revenue growth and ARPUs should benefit from the data services and 3G revenues.
Additionally, Indosat reported a decline of 67% YoY in operating profit, mainly on account of a one-off legal
provision relating to fine from the government. At the same time, Indosat's reported EBITDA and EBITDA margin
declined to IDR7.6 trillion and 42.9% from IDR8.0 trillion and 44.8% YoY, respectively.
We expect a gradual contraction in EBITDA margins as the industry matures, and mobile penetration deepens,
leading to intensified competition. Margin contraction will be further intensified by increasing data revenues,
however, we note that Indosat's adjusted EBITDA margin (about 48% for the last twelve months ended September
2014) remains strong for its rating category and compares favorably on a global basis.
As of 30 September 2014, Indosat's leverage - in terms of adjusted gross debt/EBITDA - declined slightly to 2.8x
from 2.9x as of December 2013, with approximately 49% of Indosat's total debt denominated in US dollars.
While Indosat has about USD490 million of principal and interest hedges in place as of September, we note that
these hedges have short tenors, and are reliant on the company's ability to roll-over contracts in a timely manner.
Nonetheless, the cash impact of any currency exposure is still some time off as approximately 74% of this is the
USD650 million bond which only matures in 2020. Hence, the company has time at hand to rebalance its debt mix
or resort to hedging more foreign currency debt.
Management has lowered its capex guidance for 2014 to IDR7-8 trillion from its earlier IDR8-9 trillion guidance, as
the company has now completed a majority of its network modernization program, and rolled out 3G in the major
cities in Indonesia. Capex for the nine months ended September 2014 was IDR4.8 trillion.
We expect capex to remain elevated to support further network modernization and spectrum refarming. This will
continue to pressure cash flow metrics over the next 1-2 years, and we expect the company to remain negative
free cash flow over the next 12-18 months. Nonetheless, these investments are imperative to make Indosat's
networks 3G-ready and remain competitive. We expect 2015 to a be a continuation of the transformation process
that Indosat is going through in order to build out its 3G network, and the company should also start seeing early
benefits of these investment on its topline and EBITDA. Material improvement in metrics, however, is only
expected beyond FY2015.
THE INDONESIAN WIRELESS MARKET REMAINS COMPETITIVE
With effective penetration, excluding dual SIM cards, in the 80-85% range, we believe that market conditions
remain conducive for organic revenue growth, although at a more moderate rate than before, and that the industry
will remain competitive as operators vie for subscribers.
Despite the competitive operating environment, we expect large GSM operators such as Indosat, Telkomsel and
XL to remain rational with regard to pricing strategies and limit the subsidizing of starter-pack SIMs, which have
been unprofitable in the past. Indonesia's price war of 2007/2008 and the brief price war in 2010 showed that any
gains in subscribers resulting from aggressive price cuts did not provide accretive gains in earnings; rather, they
required operators to accelerate capex at the expense of margins and financial metrics.
We expect revenues for Indonesian cellular operators to grow 6%-8% in 2015, driven by double digit growth in
data revenues and higher smartphone penetration rates. Revenue growth will be flat-lining for the saturated voice
and SMS segment. As data revenues rapidly substitute voice and SMS revenues, we expect Indonesian cellular
operators to become more competitive on data services. However, despite some price competition for data
services in the latter half of 2012, our expectation is that the key operators will remain prudent in their pricing
plans.
ADEQUATE LIQUIDITY AND COVENANT HEADROOM
Indosat has maintained an adequate liquidity and financial position for its rating category, with adjusted debt/
EBITDA of about 2.8x for the 12 months ended September 2014.
Indosat neared its maintenance covenant limits in 2009, but since then it has demonstrated a track record of
maintaining adequate headroom which we believe to be sustainable. Our expectation is for Indosat to pursue
prudent liquidity and covenant management.
Indosat's cash balance of IDR2.3 trillion as of September 2014, along with our expectation of operating cash flow
of around IDR8.5-9.5 trillion in the next 12 months, will be sufficient to cover IDR7-8 trillion in capex. Our
expectation is for Indosat to refinance the majority of its scheduled debt maturities of about IDR4.6 trillion in the
next 12 months through additional IDR bonds or bank loans. The company also used part of the proceed of its
IDR1.39 billion proceeds received in March 2014 from the sale of its 5% stake in TBI for debt repayment.
In this regard, we draw comfort from Indosat's demonstrated ability to secure financing in both IDR and USD, even
during volatile periods in the credit markets, which has helped to substantially reduce refinancing risk in the recent
past.
STRONG SHAREHOLDER PROVIDES RATING UPLIFT
Moody's considers Ooredoo's majority stake in Indosat as an important strategic investment that provides Indosat
with strong financial resources and industry expertise. It is Ooredoo's largest non-domestic subsidiary,
representing approximately 22% of its gross revenue and 24% of reported EBITDA for the nine months ended
September 2014.
Ooredoo, a larger and more geographically diversified telecom operator, enjoys a relatively strong standalone
operating and financial profile; it also benefits from strong support from the Government of Qatar, its 55%
shareholder.
We view the potential support from Ooredoo positively which results in the one-notch uplift to Ba1 from Indosat's
standalone credit strength of Ba2. Further supporting our view is the inclusion of cross-default provisions between
Ooredoo's debt and Indosat's debt.
In addition, following covenant amendments in 2009, Ooredoo has a backdoor mechanism to provide Indosat with
a subordinate shareholder loan, whose principal value will be excluded from total debt in covenant calculations.
Given the existence of a cross-default at Ooredoo, it is in the parent's interest to ensure covenant compliance at
Indosat. Moody's considers this cross-default provision to be an important factor in determining Ooredoo's
willingness to support Indosat. We note that Ooredoo has the financial flexibility to accommodate any potential
capital needs from Indosat; however, in light of Indosat's adequate liquidity and covenant profile, we don't
anticipate the need for such support from Ooredoo over the near-term.
Rating Outlook
The stable outlook reflects Moody's expectation that Indosat will maintain its position as a leading mobile operator
in Indonesia amid increasing competition for data services, and leverage, in terms of adjusted debt/EBITDA will
remain in the 2.5x -3.0x range for the next 12 - 15 months as Indosat continues its high capex for network
modernization.
What Could Change the Rating - Up
Further upward rating pressure is limited, given the degree of competition in the Indonesian cellular market and the
capex requirements at Indosat to improve its 3G networks. Moody's is also cognizant of emerging market risks
which need to be incorporated into the rating.
What Could Change the Rating - Down
Downward pressure on the rating could result from a deterioration in Indosat's standalone credit assessment,
such that (FFO + interest expense)/interest expense drops below 3.5x and debt/EBITDA increases above 3.0x on
a consistent basis.
In addition, the one-notch uplift derived from the expected support from Ooredoo could be removed if Ooredoo's
shareholding in Indosat falls below 50%, or if Ooredoo indicates that it is no longer a core asset for the group.
Other Considerations
Litigation: In January 2013, Indonesia's Attorney General's Office pressed a corruption case against Indosat and
its wholly owned subsidiary, PT Indosat Mega Media ("IM2"), in connection with the use of a 3G operating license.
Given the network operator and service provider relationship between Indosat and IM2, the latter leases the
cellular network owned by Indosat. The alleged offences are against IM2 not paying upfront fees and frequency
right fees for such network utilization. As per representations by Indosat, these views differ from that of the
telecommunications regulator, the Minister of Communications and Informatics, who has confirmed that IM2 has
not utilized the frequency and is not required to pay the frequency right fees.
In January 2014, the Appellate Court annulled the High Court's decision in July 2013 to fine the company IDR1.35
trillion (US$135 million) and pressed charges against the concerned individual only. However, Indosat remains
exposed to some uncertainty and regulatory overhang as the Attorney General's Office has the right to file a fresh
case against IM2 reinstating the fine.
As of September 2014, Indosat has fully provided for the disputed fine amount IDR1.35 trillion calculated on a
retrospective basis.
Grid-implied rating: In accordance with Moody's global rating methodology for telecommunications companies
(refer to Rating Methodology Global Telecommunications Industry, December 2010), Indosat's overall
performance measurements and underlying fundamentals (as of September 2014) -- relative to the rating
methodology -- indicate a Ba rating category, which is in line with the final rating assigned.
Rating Factors
Indosat Tbk. (P.T.)
Global Telecommunications Industry Grid [1][2]
Factor 1: Scale And Business Model, Competitive
Environment And Technical Positioning (27% )
Aaa
Aa
A
Baa
a) Scale (USD Billion)
b) Business Model,Competitive Environment &
Technical Positioning
a) Regulatory and Political
b) Market Share
x
Factor 3: Financial Policy (5%)
a) Financial Policy
a) EBITDA Margin
Factor 5: Financial Strength (47%)
a) Debt / EBITDA
b) FCF / Debt
c) RCF / Debt
d) (FFO + Interest Expense) / Interest Expense
e) (EBITDA - Capex) / Interest Expense
Rating:
a) Indicated Rating from Grid
b) Actual Rating Assigned
B
Caa
Ca
x
x
Factor 2: Operation Environment (16%)
Factor 4:Operating Performance (5%)
Ba
x
x
x
x
x
x
x
x
Ba2
Ba1
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for NonFinancial Corporations. [2] As of 9/30/2014(L); Source: Moody's Financial Metrics
This publication does not announce a credit rating action. For any credit ratings referenced in this publication,
please see the ratings tab on the issuer/entity page on http://www.moodys.com for the most updated credit rating
action information and rating history.
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Global Credit Research - 13 Feb 2015
Jakarta, Indonesia
Ratings
Category
Outlook
Corporate Family Rating -Dom Curr
Issuer Rating -Dom Curr
Moody's Rating
Stable
Ba1
Ba1
Indosat Palapa Company B.V.
Outlook
Bkd Senior Unsecured
Stable
Ba1
Contacts
Analyst
Nidhi Dhruv/Singapore
Annalisa Di Chiara/Hong Kong
Laura Acres/Hong Kong
Phone
65.6398.8315
852.3758.1537
852.3758.1310
Key Indicators
[1]Indosat Tbk. (P.T.)
Scale (USD Billion)
EBITDA Margin
Debt / EBITDA
FCF / Debt
RCF / Debt
(FFO + Interest Expense) / Interest Expense
(EBITDA - Capex) / Interest Expense
9/30/2014(L) 12/31/2013 12/31/2012 12/31/2011 12/31/2010
$2.0
$2.3
$2.4
$2.3
$2.2
48.2%
49.5%
52.9%
52.6%
54.5%
2.8x
2.9x
2.6x
2.7x
2.7x
0.1%
-3.2%
2.4%
3.1%
-1.5%
23.6%
24.3%
26.2%
26.4%
24.7%
4.3x
5.0x
5.1x
5.0x
4.3x
1.8x
0.7x
2.5x
2.0x
1.5x
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for NonFinancial Corporations. Source: Moody's Financial Metrics
Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide.
Opinion
Rating Drivers
- One of the leading mobile operators in Indonesia
- Operating environment remains competitive
- Recent weakness in operating and financial profile can be accommodated
- Adequate liquidity and covenant headroom
- Strong shareholder provides rating uplift
Corporate Profile
Headquartered in Jakarta, Indonesia, PT Indosat Tbk is a fully-integrated telecommunications network and
services provider. It provides multimedia, data communications and internet services and is also a leading
provider of international call services. With gross revenues of IDR23.8 trillion (approximately US$2.0 billion) for the
last 12 months ended September 2014, Indosat is the country's third largest cellular operator by revenue.
Indosat is 65% owned by Ooredoo Q.S.C. (previously known as Qatar Telecom) ("Ooredoo", A2 negative) which
is, in turn, 55%-owned by the Qatar Government (Aa2 stable).
SUMMARY RATING RATIONALE
Indosat's Ba1 corporate family rating combines:
1. The company's standalone credit strength which reflects Indosat's established market position, the expectation
of moderate growth in the cellular market and an improving macro-environment. However, ongoing competition,
especially in the 3G and data space, will continue to exert pressure on Indosat's margins, although we expect
margins to remain high for the rating level. Furthermore, exposure to regulatory uncertainties and emerging market
risks constrain the rating.
2. The credit support that Moody's believes Ooredoo is likely to provide in a situation of distress.
Moody's considers Indosat as a strategic investment for Ooredoo as (1) Indosat is majority owned by Ooredoo,
(2) Indosat is Ooredoo's largest non-domestic business, representing approximately 22% of gross revenue and
24% of reported EBITDA for the nine months ended September 2014 and (3) the existence of cross-default
provisions between Ooredoo's debt and Indosat's debt.
Indosat's final rating of Ba1 benefits from a one-notch uplift due to such expected support from Ooredoo.
DETAILED RATING CONSIDERATIONS
ESTABLISHED POSITION IN A GROWING MARKET AND INTEGRATED BUSINESS MODEL UNDERPIN
RATING
Indosat is the third largest cellular operator in Indonesia in terms of revenue and subscribers. As of September
2014, Indosat had 21% revenue market share and 21% subscriber market share with 54.2 million subscribers . In
comparison, its peer, PT Telekomunikasi Selular Tbk (Telkomsel, Baa1 stable) dominates the market with 139.4
million subscribers while XL Axiata (Ba1 stable) had 58.3 million subscribers over the same period.
As measured by base transceiver stations ("BTS"), Indosat has the third largest mobile network in Indonesia (after
Telkomsel and XL), with 37,382 BTS as of September 2014. Approximately, one-third of Indosat's BTS are outside
Java which should allow it to capitalize on growth opportunities in these under-penetrated markets.
Currently, Indosat has the largest allocation of 10MHz of the 900MHz spectrum; however its allocation of 3G
spectrum (2100 MHz) of 10MHz is lower than XL and Telkomsel, both of which have 15MHz in this bandwidth. In
September 2012, Indosat reallocated part of its existing 10MHz of 900 MHz spectrum for 3G services, thus
adopting a different strategy for its 3G network expansion.
Indosat has lagged its peers on 3G network coverage owing to its late start. However, we expect the company to
continue to invest heavily in its 3G capacity and coverage over the next one to two years, which should enable it
to remain competitive against its closest competitor, XL, which finds itself in a position of strength post acquisition
of Axis.
At the same time, Indosat continues to execute on its network modernization strategy enhancing service quality
and coverage.
Indosat provides a full range of services across fixed-line and cellular networks, however, as of September 2014,
its cellular business generated 80.7% of revenues, data and fixed-broadband 14.6%, and fixed-voice services
5.3%. Cellular and fixed voice revenues declined 1.3% and 6.0% year-on-year. This was partially offset by fixed
data revenues increasing by 6.6%.
Going forward, we expect revenue growth in the saturated voice and SMS segment to slow to about 5%-6%, but
Going forward, we expect revenue growth in the saturated voice and SMS segment to slow to about 5%-6%, but
which should be partially compensated by growth in data services revenues of 10%-15%.
RECENT WEAKNESS IN OPERATING AND FINANCIAL PERFORMANCE CAN BE ACCOMODATED
For the nine months ended September 2014, Indosat's results were weaker than expected but can be
accommodated within its Ba1 rating with a stable outlook.
Reported revenue declined slightly by 0.5% year-on-year (YoY) to IDR17.8 trillion, with declines in voice, SMS and
interconnection fees offsetting strong revenue growth in data and value added services. Indosat also recorded a
modest 0.8% YoY growth in mobile subscribers. However, blended average revenue per user declined to
IDR26,900 from 27,500. Revenue growth and ARPUs should benefit from the data services and 3G revenues.
Additionally, Indosat reported a decline of 67% YoY in operating profit, mainly on account of a one-off legal
provision relating to fine from the government. At the same time, Indosat's reported EBITDA and EBITDA margin
declined to IDR7.6 trillion and 42.9% from IDR8.0 trillion and 44.8% YoY, respectively.
We expect a gradual contraction in EBITDA margins as the industry matures, and mobile penetration deepens,
leading to intensified competition. Margin contraction will be further intensified by increasing data revenues,
however, we note that Indosat's adjusted EBITDA margin (about 48% for the last twelve months ended September
2014) remains strong for its rating category and compares favorably on a global basis.
As of 30 September 2014, Indosat's leverage - in terms of adjusted gross debt/EBITDA - declined slightly to 2.8x
from 2.9x as of December 2013, with approximately 49% of Indosat's total debt denominated in US dollars.
While Indosat has about USD490 million of principal and interest hedges in place as of September, we note that
these hedges have short tenors, and are reliant on the company's ability to roll-over contracts in a timely manner.
Nonetheless, the cash impact of any currency exposure is still some time off as approximately 74% of this is the
USD650 million bond which only matures in 2020. Hence, the company has time at hand to rebalance its debt mix
or resort to hedging more foreign currency debt.
Management has lowered its capex guidance for 2014 to IDR7-8 trillion from its earlier IDR8-9 trillion guidance, as
the company has now completed a majority of its network modernization program, and rolled out 3G in the major
cities in Indonesia. Capex for the nine months ended September 2014 was IDR4.8 trillion.
We expect capex to remain elevated to support further network modernization and spectrum refarming. This will
continue to pressure cash flow metrics over the next 1-2 years, and we expect the company to remain negative
free cash flow over the next 12-18 months. Nonetheless, these investments are imperative to make Indosat's
networks 3G-ready and remain competitive. We expect 2015 to a be a continuation of the transformation process
that Indosat is going through in order to build out its 3G network, and the company should also start seeing early
benefits of these investment on its topline and EBITDA. Material improvement in metrics, however, is only
expected beyond FY2015.
THE INDONESIAN WIRELESS MARKET REMAINS COMPETITIVE
With effective penetration, excluding dual SIM cards, in the 80-85% range, we believe that market conditions
remain conducive for organic revenue growth, although at a more moderate rate than before, and that the industry
will remain competitive as operators vie for subscribers.
Despite the competitive operating environment, we expect large GSM operators such as Indosat, Telkomsel and
XL to remain rational with regard to pricing strategies and limit the subsidizing of starter-pack SIMs, which have
been unprofitable in the past. Indonesia's price war of 2007/2008 and the brief price war in 2010 showed that any
gains in subscribers resulting from aggressive price cuts did not provide accretive gains in earnings; rather, they
required operators to accelerate capex at the expense of margins and financial metrics.
We expect revenues for Indonesian cellular operators to grow 6%-8% in 2015, driven by double digit growth in
data revenues and higher smartphone penetration rates. Revenue growth will be flat-lining for the saturated voice
and SMS segment. As data revenues rapidly substitute voice and SMS revenues, we expect Indonesian cellular
operators to become more competitive on data services. However, despite some price competition for data
services in the latter half of 2012, our expectation is that the key operators will remain prudent in their pricing
plans.
ADEQUATE LIQUIDITY AND COVENANT HEADROOM
Indosat has maintained an adequate liquidity and financial position for its rating category, with adjusted debt/
EBITDA of about 2.8x for the 12 months ended September 2014.
Indosat neared its maintenance covenant limits in 2009, but since then it has demonstrated a track record of
maintaining adequate headroom which we believe to be sustainable. Our expectation is for Indosat to pursue
prudent liquidity and covenant management.
Indosat's cash balance of IDR2.3 trillion as of September 2014, along with our expectation of operating cash flow
of around IDR8.5-9.5 trillion in the next 12 months, will be sufficient to cover IDR7-8 trillion in capex. Our
expectation is for Indosat to refinance the majority of its scheduled debt maturities of about IDR4.6 trillion in the
next 12 months through additional IDR bonds or bank loans. The company also used part of the proceed of its
IDR1.39 billion proceeds received in March 2014 from the sale of its 5% stake in TBI for debt repayment.
In this regard, we draw comfort from Indosat's demonstrated ability to secure financing in both IDR and USD, even
during volatile periods in the credit markets, which has helped to substantially reduce refinancing risk in the recent
past.
STRONG SHAREHOLDER PROVIDES RATING UPLIFT
Moody's considers Ooredoo's majority stake in Indosat as an important strategic investment that provides Indosat
with strong financial resources and industry expertise. It is Ooredoo's largest non-domestic subsidiary,
representing approximately 22% of its gross revenue and 24% of reported EBITDA for the nine months ended
September 2014.
Ooredoo, a larger and more geographically diversified telecom operator, enjoys a relatively strong standalone
operating and financial profile; it also benefits from strong support from the Government of Qatar, its 55%
shareholder.
We view the potential support from Ooredoo positively which results in the one-notch uplift to Ba1 from Indosat's
standalone credit strength of Ba2. Further supporting our view is the inclusion of cross-default provisions between
Ooredoo's debt and Indosat's debt.
In addition, following covenant amendments in 2009, Ooredoo has a backdoor mechanism to provide Indosat with
a subordinate shareholder loan, whose principal value will be excluded from total debt in covenant calculations.
Given the existence of a cross-default at Ooredoo, it is in the parent's interest to ensure covenant compliance at
Indosat. Moody's considers this cross-default provision to be an important factor in determining Ooredoo's
willingness to support Indosat. We note that Ooredoo has the financial flexibility to accommodate any potential
capital needs from Indosat; however, in light of Indosat's adequate liquidity and covenant profile, we don't
anticipate the need for such support from Ooredoo over the near-term.
Rating Outlook
The stable outlook reflects Moody's expectation that Indosat will maintain its position as a leading mobile operator
in Indonesia amid increasing competition for data services, and leverage, in terms of adjusted debt/EBITDA will
remain in the 2.5x -3.0x range for the next 12 - 15 months as Indosat continues its high capex for network
modernization.
What Could Change the Rating - Up
Further upward rating pressure is limited, given the degree of competition in the Indonesian cellular market and the
capex requirements at Indosat to improve its 3G networks. Moody's is also cognizant of emerging market risks
which need to be incorporated into the rating.
What Could Change the Rating - Down
Downward pressure on the rating could result from a deterioration in Indosat's standalone credit assessment,
such that (FFO + interest expense)/interest expense drops below 3.5x and debt/EBITDA increases above 3.0x on
a consistent basis.
In addition, the one-notch uplift derived from the expected support from Ooredoo could be removed if Ooredoo's
shareholding in Indosat falls below 50%, or if Ooredoo indicates that it is no longer a core asset for the group.
Other Considerations
Litigation: In January 2013, Indonesia's Attorney General's Office pressed a corruption case against Indosat and
its wholly owned subsidiary, PT Indosat Mega Media ("IM2"), in connection with the use of a 3G operating license.
Given the network operator and service provider relationship between Indosat and IM2, the latter leases the
cellular network owned by Indosat. The alleged offences are against IM2 not paying upfront fees and frequency
right fees for such network utilization. As per representations by Indosat, these views differ from that of the
telecommunications regulator, the Minister of Communications and Informatics, who has confirmed that IM2 has
not utilized the frequency and is not required to pay the frequency right fees.
In January 2014, the Appellate Court annulled the High Court's decision in July 2013 to fine the company IDR1.35
trillion (US$135 million) and pressed charges against the concerned individual only. However, Indosat remains
exposed to some uncertainty and regulatory overhang as the Attorney General's Office has the right to file a fresh
case against IM2 reinstating the fine.
As of September 2014, Indosat has fully provided for the disputed fine amount IDR1.35 trillion calculated on a
retrospective basis.
Grid-implied rating: In accordance with Moody's global rating methodology for telecommunications companies
(refer to Rating Methodology Global Telecommunications Industry, December 2010), Indosat's overall
performance measurements and underlying fundamentals (as of September 2014) -- relative to the rating
methodology -- indicate a Ba rating category, which is in line with the final rating assigned.
Rating Factors
Indosat Tbk. (P.T.)
Global Telecommunications Industry Grid [1][2]
Factor 1: Scale And Business Model, Competitive
Environment And Technical Positioning (27% )
Aaa
Aa
A
Baa
a) Scale (USD Billion)
b) Business Model,Competitive Environment &
Technical Positioning
a) Regulatory and Political
b) Market Share
x
Factor 3: Financial Policy (5%)
a) Financial Policy
a) EBITDA Margin
Factor 5: Financial Strength (47%)
a) Debt / EBITDA
b) FCF / Debt
c) RCF / Debt
d) (FFO + Interest Expense) / Interest Expense
e) (EBITDA - Capex) / Interest Expense
Rating:
a) Indicated Rating from Grid
b) Actual Rating Assigned
B
Caa
Ca
x
x
Factor 2: Operation Environment (16%)
Factor 4:Operating Performance (5%)
Ba
x
x
x
x
x
x
x
x
Ba2
Ba1
[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for NonFinancial Corporations. [2] As of 9/30/2014(L); Source: Moody's Financial Metrics
This publication does not announce a credit rating action. For any credit ratings referenced in this publication,
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