Denis O'Brien's Digicel Group faces "imminent refinancing risk" and will have to restructure a large part of its almost $7 billion (€6.3 billion) debt pile in the next 18 months, Fitch said, as it pushed its view on the telecoms group's creditworthiness deeper into what is termed junk status.
Fitch lowered its ratings on Digicel by one level to CC on Wednesday night, which implies a “default of some kind appears probable”, according to the firm’s own definition. The rating is eight rungs below what Fitch deems to be an investible grade.
“The most immediate concern is [Digicel’s] $1.3 billion notes maturing in April 2021, which Fitch believes the company will struggle to refinance amid stagnant operating performance,” the agency said. “Fitch expects that Digicel will have to restructure debt at multiple levels in the next 12-18 months, due to the group’s unsustainable capital structure and imminent refinancing risk.”
Digicel’s bonds have tumbled in value this year amid mounting concerns about how sustainable the group’s debt mountain is following earnings declines in recent years. The company, set up by Mr O’Brien in 2001, operates in 32 markets across the Caribbean, Central America and Asia Pacific regions.
It has spent more than $5 billion developing its networks and business, which has 14 million subscribers, according to its website. Mr O’Brien took $1.1 billion of dividends out of the group between 2013 and 2015.
In January, creditors holding almost $3 billion of Digicel bonds agreed to postpone getting their money back by accepting longer-dated notes in exchange for their holdings. This was described by credit ratings firms as a distressed debt exchange or restructuring.
A restructuring of the 2021 bonds, meanwhile, would likely amount to a default event and trigger a restructuring of other debt, including $3.8 billion of bonds that are due to mature between 2022 and 2024, Fitch analyst Sul Ahmad told The Irish Times.
Headroom
Digicel would be expected in the coming months to start actively working dealing with the 2021 bonds. While Fitch said a company within the group, called Digicel International Finance Limited, has some headroom to issue fresh secured debt, if it raised a significant amount of borrowings it would strain the wider business's finances.
“The group’s performance has deteriorated in recent years as double-digit revenue declines in traditional voice products outweigh growth elsewhere,” Fitch said, adding that a weakening in the currencies in its main markets against the US dollar has only added to Digicel’s problems.
“The company is diversifying away from its core mobile focus via double-digit growth in the business solutions and home entertainment segments; however, these segments only account for approximately 20 per cent of revenues,” it said.
Digicel’s debt stood at 7.5 times earnings before interest, tax, depreciation and amortisation (ebitda) at the end of June, up from 6.6 times in March 2018, according to Fitch.
Digicel declined to comment on the Fitch downgrade ahead of the reporting of quarterly results next week. However, the company previously said that its debt ratio peaked in the three months to the end of June, its financial first quarter, and is set to decline as sales earnings improve. The company is forecasting a “mid-single digit” percentage increase in earnings in its current financial year to March 2020.
