Digicel anticipates renewed investor interest in its bonds

The sale of the Digicel Pacific holdings is expected to alleviate some of the cash pressures faced by the indebted telecom provider, and improve its ratings, an outcome that the telecom provider predicts should make its bonds more attractive to investors.

But it will not benefit those Caribbean bondholders who rejected the offer when Digicel Group last restructured its debt.

Rating agencies Fitch and Moody’s placed Digicel on a watchlist for possible upgrade on the pending closure of the deal with with Australian telecommunications company Telstra Corporation Limited, whose bid values Digicel Pacific up to US$1.85 billion, the telecom said. The transaction, which is subject to regulatory approval, is due to close by the first quarter of 2022. The rating upgrade, if it happens, would be based on improved free cash flow to support its ongoing operations in the Caribbean.

“An upgrade by the rating agencies would mean that a wider range of sophisticated corporate investors could buy the Digicel bonds, which in turn should increase the value of the bonds as there is a greater potential investment pool,” said Digicel Group’s head of communications, Antonia Graham. “Secondly, a re-rating would have no impact on bondholders who rejected the previous refinancing offer,” Graham affirmed.

She added that Digicel would continue fast internet and data services to this region.

CASH POSITION

Digicel two years ago sold a portion of its cell towers in Jamaica, El Salvador and the French West Indies aimed at improving its cash position. The sale of towers was part of a wider series of refinancing of its debt, which included bondholders jumping from one set of bonds to new bonds with longer tenures.

The latest refinancing occurred in 2020, when Digicel refinanced four bonds. The telecom extended the life of the bonds for two years at lower coupon rates, reducing the company’s debt load by US$1.6 billion to about US$5.4 billion in the process. Most bondholders accepted the refinancing terms, pushing back the maturity of the bonds, which will now be redeemed mostly in 2024 and one in 2025. The few that rejected the offer argued that they would receive only cents on the dollar.

The sale of the Digicel Pacific assets should reduce the telecom’s net leverage from 6.0 times its earnings to around towards 5.0 times, earnings according to Fitch rating agency.

“To this end, it expects to fully repay the DGHL 2024 Secured 10% Notes and accrued interest valued at US$1.04 billion as of June 30, 2021. It also intends to repay a significant majority of the DGHL 2025 Unsecured 8% Notes and accrued interest, or US$419 million as of June 30, 2021,” said NCB Capital Markets in a note regarding its take on the Moody’s report on Digicel.

NCB Capital notice stated that Digicel should continue improving its liquidity profile, but could squander the opportunity unless it can refinance heavy debt maturities in two years.

“Given the review for upgrade, downward rating pressure is currently not expected but could occur, if the company fails in refinancing its 2023 maturity, fails to reduce debt as announced, or experiences a weakening of financial metrics,” the Jamaican brokerage said.

Digicel generated positive free cash flow of US$313 million over twelve months ending June, added the NCB Capital report. At that point, its cash balance was also up 85.4 per cent year on year to $456 million, which includes the US$187 million payment Digicel received in connection with an award of damages following a legal proceeding with Orange.

INSTRUMENTS

Last Friday, Fitch placed all of Digicel’s ratings on ‘Rating Watch Positive’, following the announcement of the sale of the group’s Pacific assets. The watch applies to CCC-rated Digicel Group Holdings Limited and its secured, unsecured and subordinated instruments; B-rated Digicel Limited along with its unsecured instruments; and Digicel International Finance Limited, rated as a B-, along with its instruments.

Fitch added that the rebound in tourism should benefit the economic environments in Digicel’s markets. After the sale, the company will operate in 25 markets across the Caribbean, down from 33 worldwide.

The rating agency also noted that Digicel has consistent earnings or EBITDA margins of around 40 per cent, and that the group’s US$2.3 billion in capital expenditure since fiscal 2015 should ensure network competitiveness.

business@gleanerjm.com