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Rating Action:

Moody's revises Indosat Ooredoo's outlook to negative

21 Mar 2019

Singapore, March 21, 2019 -- Moody's Investors Service ("Moody's") has revised the outlook on P.T. Indosat Tbk.'s (lndosat Ooredoo) ratings to negative from stable.

At the same time, Moody's has affirmed the company's Baa3 issuer rating.

RATINGS RATIONALE

"The negative outlook reflects a weakening in Indosat's financial metrics driven by the company's plans for accelerated 4G capex amid an intensely competitive operating environment for the Indonesian mobile sector," says Nidhi Dhruv, a Moody's Vice President and Senior Analyst.

Indosat Ooredoo's operating and financial profile has weakened significantly over past quarters, mainly due to the introduction of registration for pre-paid SIM cards in Indonesia and a more rapid decline in traditional voice and SMS revenue in 2018.

Specifically, the company's revenue declined by 23% to IDR23.1 trillion in 2018 from a year earlier, primarily driven by a 26% decline in the cellular business. Indosat Ooredoo's subscriber base also fell 47% to 58 million at the end of 2018 from 110 million at the end of 2017, while average revenue per user (ARPU) declined 8% to IDR18,700 over the same period.

"Although the Indonesian mobile sector remains intensely competitive, there has been some uptick in quarter-on-quarter ARPUs and revenue growth. A more consistent growth in revenue, leading to the company steadily recouping its market share and profitability margins, would be supportive of stabilizing the rating outlook," says Dhruv, who is also the Lead Analyst for Indosat Ooredoo.

Indosat Ooredoo has suffered steeper declines in its subscriber and revenue share due to its weak 4G networks, in turn a result of under-investment by the company over 2016-2018. In Q4 2018, the company also saw significant leadership changes resulting in a management overhaul and potentially delaying responses to the rapidly changing competitive environment.

Under the new management team, Indosat Ooredoo has significantly increased its capex plans to IDR30 trillion ($2 billion) over 2019-2021 primarily to strengthen the company's 4G networks and expand coverage ex-Java.

"The accelerated capex investment is key to Indosat Ooredoo's strategy to remain competitive, especially ex-Java against its closest competitor, XL Axiata Tbk (P.T.) (Baa3 stable). However, if Indosat Ooredoo heavily debt funds its aggressive capex plan, its leverage and cash flow metrics will remain above our tolerance for the rating," adds Dhruv.

Absent any capital restructuring initiatives, Moody's expects Indosat Ooredoo's adjusted gross leverage will remain at 3.5x-3.7x over the next 2 years. Its retained cash flow (RCF)/debt is expected to also weaken in the range of 25%-30%.

"Indosat Ooredoo is exploring alternative funding options -- including the sale of its towers and monetization of its stakes in some subsidiaries. However, although such tower sales would benefit the company's liquidity position, given the capitalization of leases, it would be leverage neutral. Furthermore, these initiatives would be time consuming -- driven by market dynamics, and subject to regulatory and shareholder approvals," adds Dhruv. The company has stated that at this time it does not foresee an imminent need to raise equity.

Indosat Ooredoo's liquidity position is strained. Its cash and cash equivalents of IDR1.0 trillion as of 31 December 2018 and available revolver facilities of IDR3.7 billion, combined with its projected operating cash flow of around IDR5.0 trillion over the next 12 months, will be insufficient to cover its debt maturities of IDR6.4 trillion and projected capital spending of IDR10.0 trillion.

Moody's expects the company will refinance its maturing debt with longer-dated rupiah bonds and bank loans. Given Indosat Ooredoo's demonstrated strong access to the domestic bank and bond markets, we consider the refinancing risk to be manageable. Earlier this month, Indosat Ooredoo successfully completed the first tranche of a bond issuance in the amount of IDR2 trillion.

Moody's remains cautious about Indosat Ooredoo's credit profile over the near-term. Nonetheless, the company's Baa3 rating continues to combine: (1) its standalone credit strength of ba1, reflecting Indosat Ooredoo's established market position, moderate financial profile and Moody's expectation for moderate growth in the Indonesian cellular market following price increases by incumbents since Q3 2018; and (2) the credit support Moody's believes Ooredoo Q.P.S.C. (Ooredoo, A2 stable) is likely to provide to Indosat Ooredoo in a distress scenario, resulting in a one-notch uplift.

The negative outlook reflects Indosat Ooredoo's weak operating and financial metrics for its Baa3 rating, with limited potential for near-term improvement in the company's underlying profitability. The negative outlook also reflects the uncertainties with regard to the timing and execution of its potential capital restructuring plan.

Moody's will closely review the company's progress over the next 12 months.

The rating could be downgraded if there is a material deterioration in its underlying credit strength, arising from a reducing market share, diminishing profit margin, weaker operating cash flow or increased shareholder returns. Metrics indicative of downward pressure include (1) adjusted debt/EBITDA rising above 3.0x; or (2) retained cash flow/adjusted debt remaining below 25%-30% on a sustained basis. In addition, the one-notch uplift (based on expected support from the parent company, Ooredoo) could be removed if the parent company's stake falls below 50% or if it indicates that Indosat Ooredoo is no longer a core asset.

Given the negative outlook, upward pressure on the rating is unlikely. However, Moody's could change the outlook to stable if there is a consistent improvement in Indosat Ooredoo's credit profile and overall profitability through organic or inorganic measures. Parameters that Moody's would consider for a change in outlook to stable include (1) consistent revenue and earnings growth; (2) a consistent improvement in its debt leverage and a clear plan and capacity for adjusted debt/EBITDA to remain below 3.0x; (3) retained cash flow/adjusted debt remaining above 25%-30% on a sustained basis.

The principal methodology used in this rating was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of the methodology.

Indosat Tbk. (P.T.) is an integrated telecommunications network and services provider in Indonesia. The company is the second-largest cellular operator in the country in terms of revenue and active subscribers. It also provides multi-media, data communications, and internet services. The company is 65% owned by Ooredoo Q.P.S.C.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nidhi Dhruv, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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