Digicel debt danger
Telecommunications provider Digicel this month received a credit rating downgrade from respected rating agency Fitch, which has cast doubt on the global company’s ability to find cash from savings or operations to pay out US$925 million in bonds that become due early next year.
In addition to Digicel possibly defaulting on the notes, a scenario which Fitch posited as being likely, given what it outlined as weak cash flow throughout Digicel’s operations, coupled with challenging market conditions, the rating agency also called into question the telecoms’ corporate governance, which is described as “weak”.
The downgrade applies to the long-term issuer default rating, IDR, of Digicel Group Holdings Limited, DGHL; Digicel Limited, or DL; and Digicel International Finance Limited, DIFL. The DGHL rating fell to CCC- from CCC; DL’s to CCC- from CCC+; and DIFL was downgraded to CCC+ from B-.
“The group’s ability to successfully refinance DL’s US$925-million senior unsecured notes due in March 2023, outside of a coercive exchange, remains uncertain due to deteriorating macroeconomic fundamentals, rising interest rates and unfavourable market conditions. There is a low margin of safety for the company, and a default and/or default-like process is a real possibility,” Fitch said.
“There is an increasing likelihood of a comprehensive restructure across the various entities due to the maturity of more than 70 per cent of the group’s consolidated debt within two years,” it added, zeroing on what is described as Digicel’s “elevated refinancing risk”.
REFINANCING THE BOND
The word from Digicel, in response to the Fitch rating downgrade, is that it would seek to refinance the bond, extending its life, and thereby avoiding a full payout. However, the company’s response gives added credence to Fitch’s conclusion that the diversified telecoms operator that provides mobile and fixed-line services to consumers and businesses in the Caribbean, does not have the cash on its balance sheet to meet the debt payment.
“We are confident we can refinance the DL23s (bonds) which are the main drivers for the uncertainty that the Fitch rating highlights,” Antonia Graham, head of communications at Digicel, said in response to a Financial Gleaner request for a comment.
Digicel’s refinancing plans bears out the rating agency’s assessment and action.
“The downgrade of Digicel Limited reflects the high refinancing risk of its US$925-million unsecured notes maturing in March 2023 due to challenging market conditions; limited cash flow from DIFL was also a consideration in the downgrades of DL and DGHL,” stated Fitch.
“The downgrade of DIFL reflects the risk of a comprehensive restructure, with incremental debt being added to its capital structure, as was done during Digicel’s 2020 debt restructuring,” the agency noted.
It pointed out that Digicel’s decision to restructure debt twice remains a constraint on the ratings of the company and its debt.
MATERIALLY WEAKER
Fitch surmised that Digicel’s financial profile is materially weaker than its regional diversified telecoms peers in the speculative-grade rating categories, including Millicom International Cellular SA, which is at BB+/stable and Cable & Wireless Communications Limited at BB-/stable. Digicel’s business profile, it said, is relatively less diversified on a service basis, given its reliance on mobile and its operations in generally poorer countries with significant exchange rate volatility.
Detailing its assessment of weak liquidity on Digicel’s balance sheet, Fitch highlighted that with DL facing the US$925-million maturity in March 2023, there was only minimal cash at this subsidiary, with US$162 million of consolidated cash of US$168 million, as of June 2022, existing at DIFL and its subsidiaries.
Digicel revenue hit US$1.8 billion for its March full year 2022, and Fitch forecast revenue growth towards US$2 billion in financial year ending March 2025. The debt levels at Digicel should dip to US$4.4 billion following the July conclusion of the sale of telecoms assets in the Pacific Islands. The sale provided US$1.3 billion in net proceeds. Of that amount, US$1.1 billion went to the redemption of the DGHL 10 per cent senior secured notes due in 2024. Even after the asset sale, the debt is still several times the annual EBITDA (earnings before interest, taxes, depreciation and amortisation), which concerns Fitch.
“In addition to cash at DL and DIFL, DGHL’s proforma cash as of 2Q22, considering the sale of DPL (Digicel Pacific Limited) and repaying US$1.1 billion of debt, was around US$400 million. In addition, US$2.2 billion of DIFL’s secured debt matures in 2024, of which US$1.2 billion is fixed rate debt at risk of resetting at higher rates,” Fitch highlighted.
Fitch believes that DGHL will consume close to US$150 million in financial year 2020 on a consolidated neutral working capital basis and including lease payments, while DIFL should generate only around US$20 million to service debt at higher parts of the capital structure.
Fitch forecasts Digicel’s operating EBITDA recovering slightly from US$580 million in financial year 2022 to US$610 million in 2024 but reasoned, nonetheless, that this level of EBITDA, after maintenance capital expenditure, was still not be sufficient to reduce the group’s debt in a meaningful way. The unsecured and convertible debt of DGHL reflects poor recovery prospects, it said, while the ratings of the senior unsecured debt at DL had below-average recovery prospects. Digicel, it suggested, had “unsustainable leverage”.
Digicel’s corporate structure, ownership and management did not escape Fitch’s criticism.
“The group has a concentrated ownership and control structure with a single shareholder who owns and controls the group and is heavily involved in the day-to-day operations of the business. Digicel’s complex group structure and incorporation status in dozens of countries results in a complex group structure that weakens both Digicel’s corporate governance and the group’s consolidated credit profile,” according to a September 2 statement posted to Fitch’s website.
Fitch named factors that could result in a future upgrade for Digicel as including successful refinancing of outstanding debt without reducing the original terms for bondholders; faster-than-expected growth in mobile service revenues, leading to EBITDA growth which would improve debt service ratios.
On the other hand, the agency cautioned that further downgrade may occur if, in Fitch’s judgement, a default or default-like process begins.