Digicel’s ‘aggressive’ past limits debt ratings uplift, Fitch says

Denis O'Brien-owned Digicel's improved creditworthiness from an up to $1.85 billion (€1.6 billion) deal to sell its Pacific unit will be limited as a result of its "aggressive" manoeuvres to restructure its debt pile twice in recent years, according to Fitch, a leading debt ratings agency.

However, both Fitch and rival Moody's have confirmed that they have put their Digicel credit ratings on review for upgrades as a result of the planned sale of the division, announced last week, to Australian telco Telstra in a deal backed by the Canberra government.

Ratings

With $250 million of the $1.85 billion consideration subject to Digicel meeting certain earnings targets in the coming years, Digicel plans to use most of the upfront proceeds to redeem its $1.05 million of senior secured notes that would ordinarily fall due in 2024 as well as most of its $425 million senior unsecured notes that are set to mature in 2025.

Moody’s said that its review may lead to a “multi-notch upgrade” from its current Caa2 Digicel rating, which is seven levels below what is classified as investment grade. Fitch has also signalled it may upgrade its Digicel rating from a similarly-low “junk bond” level.

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But Fitch warned that Digicel’s “aggressive corporate governance” in pursuing debt restructuring deals in the past two years, “remains a constraint” on the upside for the ratings.

In addition, it said: “The group has a concentrated ownership and control structure along with a complex group structure that weakens both Digicel’s corporate governance and the group’s consolidated credit profile.”

Digicel struck a deal with certain bondholders in early 2019, after months of hard negotiations, to delay getting their money back, as it struggled under a then $7 billion-plus debt mountain and declining earnings.

Last year, Mr O’Brien targeted bondholders again, negotiating a $1.6 billion debt write-down, with the company arguing that creditors would fare worse if it went into liquidation.

Structure

Moody’s said that its current review will focus on Digicel’s capital structure and liquidity profile at the closing of the Pacific unit sale early next year as well as plans for a “timely refinancing” of $925 million of bonds that fall due in March 2023.

It is unlikely that Digicel will return in the interim to paying Mr O’Brien dividends, which have been on hold since 2015 as the group grappled with its finances, according to industry observers.

It is also expected Digicel will look at the earliest opportunity to redeem what remains of a type of bond issued last year to certain creditors as part of the debt restructuring - convertible into an almost half equity share in the company if they are not taken out by June 2023.

Some $190 million of these bonds remain outstanding - equating to a potential 44 per cent stake - after Digicel bought back some $10 million of these notes late last year.

Digicel hired investment bankers in Citigroup late last year to advise on a possible sale of the Pacific operations, spanning Papua New Guinea to Fiji, Samoa, Vanuatu Tonga and Nauru, after receiving approaches for the business.

After the sale, the company will be active in 25 markets across the Caribbean, with leading mobile shares in most.