O’Brien has months to avert ceding almost 47% of Digicel to junk bondholders

Denis O’Brien must surely look upon the last seven days with mixed feelings.

The Commission of Investigation report into the controversial sale of Siteserv to the businessman a decade ago may have concluded that a decision to grant him exclusivity on the deal at the time was “tainted by impropriety” and “not commercially sound”.

But it levelled no criticism against O’Brien, as it focused on the actions of Siteserv’s then chief executive, Brian Harvey, and co-founder Niall McFadden, as the friends from college in the 1980s positioned themselves – unknown to the insolvent company’s board, advisers, bankers or shareholders – to benefit from the deal.

The long-awaited tome – which ran to more than 1,500 pages – was published, however, only days after Fitch, one of the world’s leading credit ratings agencies, issued a stark warning on the financial prospects of O’Brien’s Digicel telecoms group.

Can US modular home specialist deliver for Ireland?

---

Meme stock mania is unlikely to last

---

It’s raining metaphors at Manchester United amid soggy aftermath of underinvestment

---

Aviva Insurance Ireland CEO: ‘There is still a huge incentive for solicitors to push for litigation’

---

Even though Digicel has chipped $1.1 billion (€1.1 billion) off its debt pile in recent months, following the sale of its Pacific unit in July, Fitch said the company’s ability to refinance $925 million of bonds that fall due next March “remains uncertain”, without resorting to a “coercive exchange”.

That’s bond market jargon to describe how Digicel twisted the arms of debt investors in early 2019 into accepting delayed repayments on $3 billion of bonds – before moving more aggressively the following year to inflict $1.6 billion of debt write-offs on bondholders.

The two instances involved the exchange of existing securities for new bonds that were either longer-dated or worth less than the original. They required approval from bondholders. But these holders had little choice, as they faced recovering less in the event of Digicel – then shouldering $7 billion of unsustainable debt, after years of declining earnings – succumbing to liquidation.

The complicated 2020 debt restructuring also saw two categories of bondholders being offered, as a sweetener, some $200 million of convertible notes that allowed them to swap into a 49 per cent equity stake in Digicel if they were not bought back by June 2023.

Convertible notes

Digicel subsequently bought back about $10 million of these bonds in 2021, reducing the potential stake to 46.6 per cent. And there was a widespread view among observers even a year ago that the convertible notes would be redeemed long before the bondholders had a claim on a major stake.

Digicel was known last September, after all, to be close to agreeing the sale of its Pacific operations to Australian telecoms group Telstra (the deal, worth as much as $1.85 billion, was announced the following month). And global bond markets were riding high at the time, as a result of central banks pumping trillions of dollars into the financial system during the pandemic.

It was a market that even a company like Digicel, despite its recent form in singeing bondholders, could approach to raise money to covering maturing debt.

However, global debt markets have turned decidedly sour in the past eight months as investors bet on the pace of central bank rate hikes and what they will do to the wider economy and corporate creditworthiness.

The junk-bond markets, Digicel’s traditional stomping ground, have fared the worst. The market interest rate – or yield – on a collection of US junk bonds tracked by Bank of America has more than doubled in the past year to 8.4 per cent. Digicel’s debt is graded deep in junk territory by the main ratings agencies.

Fitch says Digicel’s financial debt has fallen to $4.4 billion as a result of the Pacific unit sale and use of much of the upfront proceeds to redeem bonds that were due in 2024. It also estimates the group’s revenues will rise 11 per cent over three years from $1.8 billion in its financial year to the end of last March, and that its operating margins will remain steady at 33 per cent. (The Pacific unit traditionally accounted for about a quarter of group earnings and had little debt of its own.)

Currency volatility

However, these forecasts ignore Digicel’s exposure to volatile currency movements across the 25 markets in the Caribbean and Central America in which it operates.

The Irish Times reported earlier this week that the company’s earnings before interest, tax, depreciation and amortisation (ebitda) dipped 2 per cent to $241 million in the three months through June, as it took a $16 million hit from currency weakness in some of its main markets, led by Haiti, against the dollar – the currency in which it reports earnings and, more importantly, in which its debt is denominated.

“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.”

A company spokesman said remaining proceeds from the Pacific unit sale and “the strength of its underlying business” mean that Digicel is “confident it is well-positioned to address upcoming maturities ahead of time”.

He didn’t say what dealing with the debt might entail. But the markets are clearly worried. The value of the March 2023 bonds have fallen to less than 64 cent on the dollar from a near-par value of more than 98 cent in January, amid concerns about investors recovering all of their money.

Documents on the 2020 debt restructuring make clear that Digicel can’t make any payments on the convertible notes if the group has defaulted “and that default is continuing”.

The question is: do the holders of these notes really want a large stake? The enterprise value levels at which Digicel’s listed peers, Liberty Latin America and America Movil, are trading suggest there’s little or no equity value in Digicel to chase – for now, at least.