O’Brien may pull off $1.7bn Digicel debt write-off – but at what cost?

Denis O'Brien scrapped a $2 billion (€1.85 billion) initial public offering of his Digicel phone group 4½ years ago, baulking at the prospect of handing over more than 50 per cent of his empire to stock market investors.

He now faces the threat of ceding almost the same stake to his own creditors – for one-tenth of that amount.

Set up by the businessman in Jamaica in 2001 after he made about €200 million from the sale of Esat Telecom to BT Group, Digicel has since spent more than $6 billion building out networks in 32 markets across the Caribbean, central America and Asia Pacific.

Digicel also paid out at least $1.9 billion of dividends to O’Brien between 2007 and 2015.

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The entire enterprise was funded through O’Brien’s love affair with the US junk bond markets. That is, until it became increasingly clear in recent years that the group’s debt levels were unsustainable as Digicel’s earnings started to decline.

A deal struck early last year with bondholders owed almost $3 billion, following months of negotiations, bought Digicel some time as the creditors agreed to delay getting their money back. It amounted to debt investors swapping their bonds for longer-dated paper.

Solution

But it was clear even at the time that this was only a sticking plaster solution. Some of the new bonds started trading in January last year at 50 cents on the dollar – indicating that the market expected O’Brien would be back again, and next time would be looking for investors to write off some of what they were owed.

Digicel announced last Friday that it was in talks with some of its bondholders about taking a haircut on their investments.

Just as O’Brien had always perfectly timed junk bond sales when markets were hot – or, as he once put it, when “hungry ducks” in the bond market needed feeding with “pieces of paper” – the billionaire has made his move to restructure borrowings at a time of fear and loathing, with the world engulfed by Covid-19.

Holders of junk-rated bonds from emerging market companies are among the most skittish investors out there, as they brace themselves for a wave of defaults. Striking now maximises O’Brien’s chances of pulling off an accord.

Details of O’Brien’s plan, published in the early hours on Thursday Irish time, show that Digicel is looking for investors in a series of its bonds, including $1.3 billion of notes due next April, to exchange their holdings for securities of lower value. The biggest write-offs are being sought from bondholders who agreed to the extend-and-pretend deal early last year.

All told, the debt restructuring is aimed at wiping $1.7 billion – or almost 25 per cent – off the group’s $7 billion debt pile.

Equity

In return, O’Brien has committed to injecting about $50 million of fresh equity into the group to give additional protection to creditors after the debt overhaul. This is comprised $25 million in cash and the group’s Jamaican headquarters, which he owns and is valued at $25 million.

In addition, two categories of bondholders are being offered a total of $200 million of convertible notes in a new company being set up near the top of group's corporate tree, called Digicel Group 0.5 Limited. These securities will convert into a 49 per cent stake in the company if they are not redeemed beforehand.

Digicel and O’Brien, who owns 99.9 per cent of the group, will be highly motivated to redeem these bonds in the interim, helped by the fact that the group will have a much lower debt pile and signs that its earnings have stabilised in recent quarters. The debt restructuring plan is aimed at saving $130 million in annual interest payments.

But the terms of the convertible bond highlight how much value has been destroyed since O’Brien pulled the company’s New York flotation at the 11th hour in October 2015.

Valuation

At the time, potential stock market investors were understood to have put an equity valuation of just under $2 billion on the business, before the proceeds of the initial public offering (IPO). O’Brien was holding out for a deal that valued the company at $3 billion, before new money. About $1.3 billion from the IPO funds were earmarked to pay down group debt.

With little or no equity cushion currently in the business, Digicel bondholders are a captive bunch.

Indeed, a large chunk of them have already committed to support the deal, knowing that their interests in keeping the show on the road are aligned with O’Brien. Digicel has reserved the right to impose losses on investors who are tempted to hold out, if it gets sufficient backing from others to legally enforce it.

Some may conclude after all this that bond markets are done with Digicel and that it will never be able to raise fresh debt again. But everything has its price.

Future investors will have to consider not only Digicel’s improved balance sheet, but the pain some had to endure to get there.