Digicel bondholders’ backs against wall as O’Brien returns for more debt relief

For a bunch of Digicel bondholders owed $925 million (€874 million), who refused three years ago to share the pain when Denis O’Brien’s debt-laden telecoms group sought debt relief, a belated reckoning is imminent.

This pesky group was alone to push back when Digicel sought $1.7 billion of debt write-offs from various bondholder categories in early 2020 against its then $7 billion debt pile.

As they were only being asked to shoulder $100 million of the losses, O’Brien decided to press on without them in a large restructuring that would see Digicel file for Chapter 15 bankruptcy protection in New York that May.

The $925 million of junk-rated senior unsecured bond debt is due to be repaid on Wednesday. Digicel hasn’t the money to make good, with only $315 million of “stand-alone cash” on the group’s balance sheet as of December, according to Fitch, the debt ratings agency.

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Digicel told bond creditors last November that it was in talks with some of the larger holders of the March 2023 bonds to try and postpone repayments on the notes, even though there were concerns in the market that this would be little more than a sticking-plaster solution for a business that continues to have way too much debt.

In order to avert a default event next Wednesday, Digicel moved earlier this week to seek official consent from holders of the bonds to secure an initial 30-day grace period as it continues negotiations on the debt. Most have signalled their support.

A spokesman told The Irish Times that the company “remains in active and ongoing discussions with its creditors and advisers on a number of strategic alternatives with respect to a potential financial restructuring”.

[ Digicel downgraded by Fitch amid debt restructuring talks ]

It understood Digicel is no longer looking to just extend the maturities of the March notes, like it did with $3 billion of bonds in early 2019, but more along the lines of the deep restructuring carried out a year later, involving the debt writedowns.

It shouldn’t surprise. After all, the March bonds have been trading below 40 cents on the dollar since November – amid concerns about investors recovering all of their money.

Digicel’s last face-off with creditors at the onset of the Covid-19 shock in early 2020 followed years of earnings decline and a period between 2007 and 2015 when O’Brien had extracted at least $1.9 billion of dividends from the group

Fitch downgraded its stance on Digicel’s creditworthiness this week to reflect, as it put it, “the increasing risk of a comprehensive restructuring with incremental debt being added to its capital structure or otherwise resulting in an outcome deemed by Fitch to be a distressed debt exchange”.

While Digicel managed to slice $1.2 billion off its debt pile last year with the initial proceeds from the sale of its Pacific unit in July to Australian peer Telstra, it continues to have $4.55 billion of bonds and corporate bonds outstanding – a burden viewed by Fitch to be “unsustainable” given the company’s deteriorating earnings outlook. More than 80 per cent of the debt is due to mature within three years.

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Trading in the bonds that mature over the medium term tells its own story. Digicel’s $380 million of bonds due in December 2025 are currently changing hands at a little over 50 cents on the dollar, according to Bloomberg data. Investors trying to offload some of the $447 million of notes that fall due earlier that year are getting less than 25 cents.

These are also likely to be in O’Brien’s sights as he looks to overhaul Digicel’s debt.

Digicel’s last face-off with creditors at the onset of the Covid-19 shock in early 2020 followed years of earnings decline and a period between 2007 and 2015 when O’Brien had extracted at least $1.9 billion of dividends from the group – fuelled by loading the company with more borrowings.

[ Digicel seeks grace period on $925m debt amid restructuring talks ]

While underlying revenues and earnings rebounded somewhat in the year to last March and the trend continued over the following six months, the prospects of raising money in the debt markets to refinance the March notes deteriorated as the 2022 year progressed, as central banks hiked rates to tackle inflation.

The US junk bond market, beloved by O’Brien during the era of cheap money, was particularly badly affected.

The descent of Haiti, Digicel’s biggest market by mobile phone subscribers and one of its traditional main earners, into political, economic and humanitarian crisis after fuel subsidies in the country came to an end last September, prompted the group to warn in November that its Haitian earnings would slump by as much as two-thirds in the second half of its financial year to March, to as low as $25 million.

The Haitian dollar has also slumped by 30 per cent in the past year against the US dollar, the currency of Digicel’s financial reports and its debt.

Few would be willing to wager real money on O’Brien losing control of the company as part of the process. But what will he be left with?

Fitch said it expected the crisis in Haiti would also weigh on the group through the upcoming financial year to March 2024.

With Digicel deep in negative equity, the bondholders’ backs are up against the wall. They would stand to fare much worse in a liquidation than surrendering to a debt restructuring, and they know it.

O’Brien will probably be expected to inject a few bob into the company to sweeten the deal, along the lines of the $50 million he contributed to the 2020 overhaul. Will it be any more than a token gesture again?

[ Haiti, on the brink, focuses minds as O’Brien pleads for more time on Digicel debt ]

Meanwhile, there are about $190 million of convertible notes – handed out to two categories of bondholders to get the 2020 debt write-off over the line – that can technically be swapped by bondholders for a 46 per cent stake in the company from June.

These are currently trading at a little over 11 cents on the dollar and would likely be restructured as part of any fresh deal, according to observers.

Few would be willing to wager real money on O’Brien losing control of the company as part of the process. But what will he be left with? A company that will probably still be carrying more debt than it should – with little prospect of returning to paying dividends to its owner any time soon.