International ratings agency, Fitch has revised and assigned new ratings to Digicel’s corporate family following the conclusion of its distressed debt exchange.
Specifically, Fitch has assigned a new Long-Term Foreign Currency-Issuer Default Rating to Digicel Group 0.5 Limited of ‘CCC’, downgraded Digicel Limited to ‘RD’ from ‘C’, and simultaneously upgraded it to ‘CCC’ from ‘RD’. Fitch has also affirmed Digicel International Finance Limited at ‘CCC+’.
Fitch has downgraded the Long-Term Foreign Currency-Issuer Default Rating of Digicel Group Limited (DGL3), Digicel Group Two Limited (DGL2), and Digicel Group One Limited (DGL1) to ‘D’ and has withdrawn the ratings of ‘C’, ‘RD’, and ‘RD’, respectively.
Fitch has simultaneously withdrawn its ratings on those entities’ unsecured instruments, including the non-tendered notes from the two debt exchanges. Fitch expects these entities to remain dormant and hold the potential to be liquidated in the future.
For Digicel Limited, an ‘RD’ will be recorded to denote the completion of the company’s distressed debt exchange and the new rating will then apply. The other entities involved in the distressed debt exchange were previously at ‘RD’, following the expiration of their interest grace periods.
The ratings for the surviving entities in Digicel’s corporate structure reflect the improvements of the Jamaica-based regional telecoms giant’s financial structure and flexibility following the reorganisation and restructuring of its massive US-dollar debt.
Fitch reports that the consolidated credit profile of Digicel is consistent with a ‘CCC’ category issuer, as leverage ratios remain high and economic conditions in the company’s main operating environments remain quite challenged. According to Fitch, “the company’s debt restructuring provides the company additional time to turn around operating performance, and for economic performance in its markets to stabilise or improve”.
Over the last several years Digicel’s revenues have been under pressure, primarily due to currency devaluation in its markets and also because declining mobile voice revenues have outweighed gains elsewhere. The company’s business profile is relatively strong, however, the group’s willingness to execute multiple debt restructurings in a short time frame will weigh on the company’s ratings.
Digicel’s debt restructuring has cut gross debt by approximately $1.5 billion dollars, from $7.0 billion to $5.4 billion. As a result, Fitch says Digicel’s total debt/EBITDA should decline from 7.5x to 5.9x on a pro forma basis.
However, Fitch does not expect Digicel to deleverage significantly, as adjusted EBITDA generation remains pressured in the company’s markets due to currency depreciation and the secular decline in voice revenues. Fitch forecasts that consolidated leverage will stabilise around 6.1x-6.3x, as interest accrues amid operational cash flow stagnation.
Fitch notes that Digicel’s decision to restructure debt for the second time in as many years remains a constraint on the ratings. Digicel has a concentrated ownership and control structure along with a complex group structure that weakens both its corporate governance and the group’s consolidated credit profile.
While the group’s financial reporting is appropriate and consistent with peers, management’s financial strategy of carrying high leverage and a history of high shareholder distributions further weigh on the company’s overall corporate governance assessment. The shareholder made a small equity contribution of $50m as part of the distressed debt exchange.
Local currency revenues have shown signs of growth, however, the decline in mobile voice combined with currency depreciation in the company’s markets outweigh underlying gains in other segments.