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Rating Action:

MOODY'S ASSIGNS PROVISIONAL (P) B2 FOREIGN CURRENCY ISSUER RATING TO PT INDONESIAN SATELLITE CORPORATION TBK AND LONG-TERM DEBT RATING TO INDOSAT FINANCE CO. B.V.'S PROPOSED USD BONDS; OUTLOOK STABLE

20 Oct 2003
MOODY'S ASSIGNS PROVISIONAL (P) B2 FOREIGN CURRENCY ISSUER RATING TO PT INDONESIAN SATELLITE CORPORATION TBK AND LONG-TERM DEBT RATING TO INDOSAT FINANCE CO. B.V.'S PROPOSED USD BONDS; OUTLOOK STABLE

Hong Kong, October 20, 2003 -- Moody's Investors Service has assigned a provisional foreign currency issuer rating of (P)B2 to PT Indonesian Satellite Corporation Tbk (Indosat) and foreign currency long-term debt rating of (P)B2 to the proposed USD200 million 144A and Reg S issue of Indosat Finance Company B.V., a wholly-owned subsidiary of Indosat. This is the first time that Moody's has assigned ratings to Indosat. The outlook for the ratings is stable.

The (P)B2 debt rating is based on the unconditional and irrevocable guarantee to be provided to the securities by Indosat, PT Satelit Palapa Indonesia (Satelindo) and PT Indosat Multimedia Mobile (IM3) on a joint- and several-basis.

The securities will be sold in a privately negotiated transaction without registration under the Securities Act of 1933 (the "Act") under circumstances reasonably designed to preclude a distribution thereof in violation of the Act. The issuance will be designed to permit resale under Rule 144A.

The provisional B2 rating is based on Moody's review of documentation as of October 16, 2003 and we expect a B2 definitive rating to be assigned upon review of the final documentation and a successful drawdown of the USD bonds, Rupiah bonds and Rupiah bank loan.

The ratings reflect the following positive factors: [1] the solid growth potential of Indonesia's underserved, large and rapidly growing cellular market; [2] the technology and operational benefits associated with ST Telemedia's (unrated) participation; [3] other revenue streams which provide for diversification, including IDD and MIDI services; and [4] strong recurring operating cash flows generated by Indosat's stable and growing cellular subscriber base with its market share of 30%, although Moody's expects the company to remain free cash flow negative until at least 2006 as it expends substantial capital expenditure to upgrade and expand its network.

On the other hand, Moody's says the ratings also consider the following risks: [1] high levels of political, economic and social uncertainties in Indonesia; [2] uncertainties associated with the regulatory environment for telecommunications; [3] the challenges Indosat faces in executing its business plan in a competitive environment, and which may result in it remaining free cash flow negative for longer than anticipated; and [4] Indosat's generally weak alternate liquidity profile. The rating further incorporates the risk of effective subordination for the proposed unsecured USD bond issuance.

Moody's notes that the planned bond issue is part of a larger refinancing exercise, involving USD and Rupiah bonds and a syndicated Rupiah bank loan. The (P) B2 bond rating assumes a successful closing of the USD bond, the Rupiah bond and the Rupiah bank loan within a short time frame. If Indosat experiences difficulties in obtaining financing via the USD bonds and Rupiah bonds at the levels it currently plans, then the B2 senior unsecured debt rating may be downgraded to B3 to reflect the increased refinancing risk for 2004-2007. The risk of this downgrade occurring depends on the materiality of any shortfall in the issuance of the planned bond issues versus capital expenditure and refinancing needs. At the same time, Moody's understands that, barring material adverse changes to the conditions of Indosat's business and its enviroment, Indosat should receive the Rp2.5 trillion raised from its recent Rupiah bond offering shortly.

Moody's notes that Indosat Group -- through its investments in Satelindo and IM3 -- is Indonesia's second largest ceullar service provider. In view of the country's low cellular penetration rate of about 5.2% and population of over 200 million, the market's growth potential is undoubtedly substantial.

Indosat is well positioned to capture part of this growth in the next few years and going forward, cellular will remain the key driver for its revenues and EBITDA growth. This situation should mitigate anticipated declines in IDD revenue, due to the early termination -- with Telkom's entry -- of Indosat's exclusivity rights in the IDD market.

Moody's expects Indosat's leverage to increase to over 50% after the financing exercise as additional funds are raised to fund planned capital expenditure resulting in EBITDA/Int falling to a low of approximately 3.5-4.0x in FY 2004 and 2005 from 5.9x in FY2002. However, the expected growth in EBITDA and gradual debt repayment will see interest coverage improving in subsequent years. While the company had demonstrated its ability in the past to produce positive gross cash flows, current large capital expenditure requirements mean that it is unlikely to be free cash flow positive until 2006 at the earliest.

Indosat's place of domicile constitutes a risk factor as its operating performance correlates closely with the state of the Indonesian economy. In the event of economic deterioration, the company may experience pressure from the government -- which holds a special share -- or from regulatory authorities to reduce tariffs.

Currency volatility may also impact its risk profile, given that its proposed USD Notes issuance and capital expenditures are predominantly USD denominated. At the same time, post-refinancing, Indosat's overall debt maturity profile will be extended, compared with the current clustering around 2004-2007.

Indosat's overall liquidity profile is weak with no ongoing committed back-up facilities for contingencies. At the same time, its liquidity risk is partly mitigated by cash on hand and part of its capital expenditure program is discretionary and can be deferred, if necessary.

The (P)B2 rating has already accounted for the effective subordination of unsecured creditors. Of the total intended refinancing of about Rp7 trillion, at least approximately Rp1.5 trillion of its Rupiah bank loan will be secured by its cellular assets. This creates effective subordination for unsecured creditors, given more than 20% of total debt (including vendor financing) is secured. Moody's understands that the level of secured bank debt may further increase in the event of a shortfall in its USD bond issuance.

Moody's also understands that the company has the ability under the bond covenants to increase the level of secured debt in a material way, albeit we understand it is not the company's intention to do so. In the event that the company increase the level of secured debt materially more than we originally anticipated, there is a possibility of notching down the unsecured debt rating to reflect potential deeper effective subordination of unsecured lenders.

PT Indonesian Satellite Corporation Tbk is based in Jakarta. Indosat provides cellular services and international call services in Indonesia, as well as MIDI (multimedia, data and internet) services to Indonesian and regional corporate and retail customers.

Sydney
Brian Cahill
Managing Director
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100

Hong Kong
Mable Chan
Vice President - Senior Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
Telephone: 852-2509-0200
Facsimile: 852-2509-0165

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