Fitch upgrades Digicel units but warns of risks

Fitch has upgraded much of Digicel's $5.5 billion (€4.62 billion) debt pile from a rating that flagged a real possibility of default, but warned the Denis O'Brien-owned telecoms group's recent history of "aggressive" actions against bondholders will continue to drag on its creditworthiness.

The debt ratings agency lifted its ratings on Digicel units responsible for $3.83 billion of the group's borrowings from CCC and CCC+ to B-. However, the new grade remains deep in so-called junk status territory, 15 rungs below its top-notch AAA rating.

Digicel, with operations in 32 markets across the Caribbean, Central American and Asia Pacific regions, moved in April last year to restructure its then unsustainably high-debt level of $7 billion following years of earnings decline, resulting in bondholders writing off $1.6 billion of what they are owed.

The transaction involved the creditors swapping their bonds for securities of a lesser value and has been described by credit ratings agencies as a “distressed debt exchange”.

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It followed on from another deal struck with some bondholders the previous year to postpone debt repayments.

While Fitch has concluded that Digicel is on a firmer financial footing following the debt overhaul, it cautioned: “The aggressive corporate governance that resulted in two debt restructurings in the last two years is a negative for the group’s ratings.”

Digicel, which is scheduled to report full-year figures next week, should see its revenues rise about 9 per cent to $2.4 billion over the course of three financial years to March 2024, according to Fitch, as rising data revenues outweigh declining voice revenues and turnover from its business and home entertainment services also grow.

‘Refinancing risk’

Fitch also expects Digicel to maintain cash balances of about $400 million over the near term. Although the group does not face any major debt maturities until $925 million unsecured notes fall due in March 2023, the ratings firm said that “refinancing risk for these notes will remain high”.

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

However, a potential deal is set to drag into the second half of 2021, as Covid-19 travel restrictions across the region have made it difficult for suitors to carry out site visits, according to sources.

“A sale of the company’s Pacific assets is not factored in the base case, but would be a positive for the company’s credit profile if a successful sale enabled the company to pay down DGHL debt and reduce the associated interest expense,” Fitch said, referring to Digicel Group Holdings Limited, a company at the top of the group’s corporate structure.