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The Digicel headquarters in downtown Kingston.

Digicel debt ‘unsustainable’

The Digicel headquarters in downtown Kingston.

Digicel mobile phones are in more hands and pockets than any other telecommunications company in Trinidad and Tobago and the Caribbean. But the company is facing a battle for its survival as it deals with declining revenues, increasing finance costs and what its directors refer to as “unsustainable volumes of funded indebtedness”.

Information on the company is contained in a 757-page document, dated May 15, 2020, filed with the US Securities and Exchange Commission.

The document pertains to Digicel’s scheme of arrangement between Digicel Group One Ltd and the DGL1 scheme creditors, which was filed with the Bermuda high court.

Following the lodging of the scheme of arrangement with the Bermuda court, Digicel hired three provision joint liquidators and commenced a filing under Chapter 15 of the US Banktuptcy Code with the US Banruptcy Court in the Southern District of New York on May 15. The company insists that it did not file for bankruptcy, contrary to the headline of the story that was posted on the Express website on May 18. (See Q&A)

In a frank letter addressed to DGL1 scheme creditors, the company’s board of directors said the Digicel group “enjoys a strong market position across the 31 telecommunications markets in which it operates,” generating US$2.30 billion for the year ended March 31, 2019.

The group’s revenues in 2019 declined from the US$2.41 billion it earned in 2018 and the US$2.50 billion in 2017, which means the group’s revenue declined by eight per cent between 2017 and 2019.

While Digicel’s revenue is declining, its finance costs rose from US$465.3 million in 2017, to US$503 million in 2018 and US$558.4 million in 2019.

“These rising finance costs were accompanied by declining revenues in certain of the group’s key markets,” said the letter to the scheme creditors.

“In Haiti, revenue decreased by US$47.1 million, or 13.3 per cent, to US$307.4 million in the year ended March 31, 2019 from US$354.5 million in the year ended March 31, 2018.

“In Jamaica, reported revenue decreased by US$31.1 million, or 8.2 per cent, to US$349.2 million in the year ended March 31, 2019 from US$380.3 million in the year ended March 31, 2018. In the French West Indies, revenue decreased by US$12.4 million, or 7.1 per cent, to US$163.4 million in the year ended March 31, 2019 from US$175.8 million in the year ended March 31, 2018.”

Digicel said these declines in revenue were partially offset by small increases in other markets in which the Group operates.

Digicel is dependent on revenues from five of its key markets—Jamaica, Haiti, Papua New Guinea, Trinidad and Tobago and the French West Indies—which contributed 61 per cent of its total revenue, in the six months ended September 30, 2019

• Jamaica—15.6 per cent

• Papua New Guinea—15 per cent

• Haiti—12 per cent

• T&T—11.7 per cent

• French WI—6.6 per cent

Declining revenues and higher finance costs meant the telecommunications company recorded a net loss of US$36.9 million in 2017, US$219.5 million in 2018 and US$287.2 million in 2019.

Voice drops

According to the letter to the DGL1 scheme creditors: “…In recent years the Group has seen significant reductions in voice revenues, which are largely due to the industry-wide trend of voice services being substituted by data usage by mobile subscribers.

“The growth of data revenues and revenues from other related services such as business solutions and cable television and broadband has not been sufficient to offset the decline in voice revenues. In addition, the expansion into business solutions and cable television and broadband has required significant capital expenditures, which have reduced the Group’s ability to generate operating free cash flow and reduce its finance costs.”

That capital expenditure, which the company says amounted to US$1.3 billion for the three years ended March 31, 2019, was mostly spent rolling out its fibre-to-the-home and fibre-to-the-business networks.

Digicel said it has evolved from a pure mobile telecommunications company into a leading integrated communications and entertainment provider.

“This evolution has included the expansion of Digicel’s product offerings through developing Digicel’s Business Solutions services and entering the cable television and broadband businesses, which have lower penetration rates than the mobile business in Digicel’s markets.

But even though Digicel says it provides mobile communications services to 12.9 million subscribers in 31 markets with an aggregate population of approximately 33.4 million people, the company is still largely dependent on its mobile revenues, which accounted for 71.7 per cent of the US$2.30 billion in revenue as of March 31, 2019.

Debt rises

But the company’s biggest challenge is its total outstanding funded debt of US$7.4 billion as at September 30, 2019.

The company restructured its debt in January 2019, exchanging debt that was due to mature in 2020 for new maturities with debt in 2022 and 2024. Despite this, the company’s letter to its scheme creditors said, Digicel continues to have over US$1 billion in debt due to mature in 2021.

“The group therefore faces the need to repay or refinance approximately US$4 billion in debt over the near-to-medium term,” leading the group “to propose a more comprehensive restructuring of its existing indebtedness.”

In the letter to its scheme creditors, Digicel said: “The discussions resulted in a transaction proposal that, if fully implemented would reduce the Group’s total debt by approximately US$1.7 billion, reduce its annual cash interest payments by approximately US$125 million and extend maturities.”

Q&A

Last week Tuesday, Express Business submitted 12 questions to Digicel Group CEO, Jean-Yves Charlier:

Q: Is Digicel insolvent as at May 19, 2020? Like most other people, I define insolvent as being unable to pay one’s debt on time and in full.

A:The Group is not insolvent—neither at the Group level, nor at the level of any of its operating companies in the 31 markets in which we operate.

Q: Can you confirm that as of September 30, 2019, Digicel’s total debt was US$7.4 billion and its net assets were US$3.45 billion, meaning that Digicel had negative net worth of US$4.20 billion? Is it true that the US$7.4billion in total debt excludes deferred financing fees and accrued interest?

A: As at 30th September, the gross debt, including IFRS16 leases was US$7.4 billion. Consistent with normal accounting practice gross debt, this does not included financing fees and accrued interest. The latter liabilities amount to approximately US$100 million. Our assets are typically recorded at cost (less depreciation) and do not reflect the “market value”. It is not accurate to say the balance sheet is “insolvent” to the tune of US$4.2 billion. The solvency of a business relates to its ability to manage its debts as they fall due. We have reached agreement with our creditors to reduce our debt by $1.7 billion and push out maturities to an average life of approximately five years.

Q: In the event Digicel’s bankruptcy filing is reactivated, how many cents on the dollar are its secure creditors likely to receive?

A: As mentioned above Digicel has not filed for bankruptcy. The consideration transferred to each bondholder varies depending upon which debt instruments they hold and how quickly they accepted the offer. DGL1 Holders will receive US$0.94 per US$1 held and DGL2 Holders with notes due 2022 will receive US$0.35 per US$1 held and DGL2 Holders with notes due 2022 will receive US$0.25 per US$1 held. The secured debt currently held by DIFL Lenders and Bondholders is not affected by the Transaction.

Q: What is indicated by the fact that Digicel is seeking a debt restructuring in April 2020, when it went through a similar exercise last year?

A: The exchange offer which completed in January 2019 simply extended the maturities of the Digicel Group Limited Notes by two years and the current transaction involves a more comprehensive restructuring.

Q: Is Digicel facing a situation in which its finance costs are rising, and this is before the Covid-19 pandemic? The refinancing will significantly reduce the Group’s future financing costs with annualised cash interest savings of approximately US$125m.

A: Digicel is facing a situation in which revenues in some of its key markets (such as Jamaica, Haiti and the French West Indies) is falling, and this is before Covid-19?

Prior to COVID-19, the Group has for several quarters improved its revenue year on year (excluding the impact of FX) both at a Group Consolidated basis and in many of its Markets.

Reproduced from the Trinidad Express