Fitch pushes Denis O’Brien’s Digicel deeper into ‘junk’ status

Debt ratings firm Fitch lowered Digicel's creditworthiness deeper into "junk status" over the weekend amid mounting concerns over how businessman Denis O'Brien's phone group will refinance billions of dollars of bonds that fall due in the coming years.

Fitch lowered its rating on Digicel, which has a total $6.7 billion (€5.8 billion) debt pile, by one level to B–, which counts some six notches below what it considers to be “investment grade” and 15 rungs below its top rating of AAA.

The downgrade comes at a bad time for Digicel, which operates across 32 markets in the Caribbean and South Pacific regions, as it seeks to convince financial markets that it will be able to refinance some $2 billion well in advance of when they are due to be redeemed, in September 2020. The value of the bonds have fallen to 70 cent on the dollar from 100 cent in January, with the sell-off compounded by global investors’ concerns about emerging market debt in general.

Digicel’s debt level stood at seven times adjusted net earnings before interest, tax, depreciation, amortisation and rent costs (Ebitdar) at the end of March, up from a ratio of 6.3 a year earlier, Fitch said.

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“Material improvement in leverage ratios with sustainable free cash flow generation in the short to medium term is critical for the company to mitigate any refinancing risks ahead of bond maturities of $5.7 billion” by March 2023, Fitch said.

Strong track record

Digicel has repeatedly said in recent months that it has a “very strong track record of refinancing comfortably ahead of bond maturities”.

Fitch added it it has a “negative” outlook on Digicel’s debt rating, amid concerns over the group’s ability to lower its debt mountain through asset sales.

The Irish Times reported in June that the company plans to sell up to $500 million of assets by the end of next March and increase earnings by 10 per cent to about $1.1 billion to cut its debt burden. The company has pledged to its bondholders that it will reduce its debt burden to 5.7 times Ebitda by the end of March next year from 6.7 times in March 2018.

Fitch also noted that the dollar’s appreciation against a number of other currencies this year has also added to Digicel’s woes.

“Digicel is subject to an FX [foreign exchange] mismatch as its debt is 95 per cent US dollar-denominated, against 50 per cent of Ebitda generation in US dollars or currencies pegged to the dollar,” Fitch said.

“Fitch Macro Intelligence projects continued appreciation of the dollar against Digicel’s basket of currencies, which will continue to weigh on the company’s cash flow generation and its ability to service debt obligations,” it said, adding that dollar appreciation may shave $200 million off its annual sales and $100 million off its earnings, respectively, by 2021.