Two days before St Patrick’s Day last year, Denis O’Brien found himself feted at the storied Metropolitan Club on Manhattan’s Upper East Side, as the businessman was inducted into Irish America magazine’s Hall of Fame at its annual lunch.
“We’re into a very volatile period over the next few years,” O’Brien warned the audience of Irish-American business leaders, when asked by the magazine’s co-founder Niall O’Dowd about the impact of the war in Ukraine on global markets.
When asked about Haiti, one of the main earners in his Digicel telecoms group and an impoverished country where he has spent millions in donations, he said it needed a type of Marshall Plan (US aid used to rebuild Europe post 1948). Haiti has lurched from one natural disaster and episode of public unrest to another since his company launched a service there in 2006.
O’Brien was not to know it at the time but the market turbulence he foresaw, and the descent of Haiti in the past six months to the brink of state failure, hitting Digicel earnings, would push the entrepreneur into a fresh face-off with bond investors of his over-indebted Digicel – only three years after creditors were strong-armed into writing off $1.6 billion (€1.5 billion) of its then $7 billion of borrowings.
Another debt write-down is now on the table, Digicel confirmed in a statement issued at 1am Irish time on Wednesday, this time for $1.8 billion – or 40 per cent of Digicel’s current $4.55 billion of outstanding bonds and loans. Only now, creditors want a bit more than the $50 million O’Brien personally committed in cash and assets as a concession last time round.
O’Brien has agreed to cede control of the telecoms empire he has built over the past 22 years – to span as many as 33 markets at its peak – to bondholders in exchange for a “comprehensive restructuring” of the business.
O’Brien’s hopes of remaining in control of Digicel with it remaining a highly-leveraged company ultimately ran out of road
Sources told The Irish Times that the Digicel chairman, who owns 99.9 per cent of the business, may end up losing as much as 90 per cent of the company he set up in Jamaica in 2001 after netting more than €200 million from his sale of Esat Telecom to BT Group the previous year.
“The recent surge in interest rates globally has shifted the power to debt holders in situations like Digicel,” says a financial analyst who follows Digicel, and who spoke under the condition of anonymity. “O’Brien’s hopes of remaining in control of Digicel with it remaining a highly-leveraged company ultimately ran out of road.”
The 10-20 per cent stake he is on track to retain, pending the final outcome of ongoing discussions, would include shares and warrants awarded as an incentive to the Irishman to stay involved in the business and maintain key relationships in its remaining 25 markets across the Caribbean and Central America, the sources say. The initial stake, however, will be about 10 per cent, they add.
“The relationships Denis has with regulators and politicians in the emerging and some frontier markets is exceptionally important,” says an investment manager with a firm that holds Digicel bonds. “It is difficult to form an argument that anybody could run the business at this stage other than Denis. That’s a widely-held view among investors.”
The latest talks came to a head after Digicel entered fresh restructuring negotiations last year with bondholders who were due to have $925 million repaid on Wednesday. The group only had $315 million of “stand-alone cash” on its balance sheet as of December, and had little chance of raising more money on the bond markets to refinance the debt, as borrowing costs soared over the past year, as the war in Ukraine fuelled inflation globally and forced central banks to hike official rates.
It is difficult to form an argument that anybody could run the business at this stage other than Denis
The investment manager said that even if it had been possible for Digicel to raise money in the market to refinance the March 2023 bonds, which were originally issued to carry an interest rate – or coupon – of 6.75 per cent, the company would face a prohibitive rate of 18-20 per cent in today’s market. That is because the high-cost, US junk bond market so beloved by O’Brien in the past has been among the worst affected by recent turbulence across global debt markets.
The general view among analysts and investors was that O’Brien has long regretted pulling a planned initial public offering (IPO) of shares in October 2015. It was a deal that aimed to raise $2 billion, mainly to pay down debt. But the businessman baulked at the 11th hour when it became clear that investors were looking for an equity stake of more than 50 per cent.
The company was “balance sheet insolvent” at the time, meaning its liabilities outweighed the value of its assets – and has remained pretty much so ever since.
Digicel has spent €5 billion over more than two decades building out mobile and other telecoms networks across its markets, funded mainly by junk bond sales. O’Brien also extracted at least $1.9 billion of dividends from the group between 2007 and 2015, before investors started to become concerned about the company’s debt level.
The businessman has also benefited to the tune of tens of millions of euros over the years from fees generated by his Island Capital advisory business, which plays a role in Digicel transactions, as well as service fees the company pays to other parts of his business empire.
“Denis ran the balance sheet hard for too long, taking too much dividends in the process,” says another analyst. “He rode the mobile penetration wave and growth as it entered new markets, but when penetration hits more mature levels, a business like this needs to ease up and shift to a lighter debt capital structure.”
Digicel was sitting on $7 billion of debt in early 2019 when bondholders behind $3 billion of the borrowings agreed to postpone repayments to give the company breathing room at a time when its earnings were declining.
The company moved more aggressively at the onset of the Covid-19 crisis in early 2020, convincing bondholders to write off $1.6 billion of debt. Both sides knew they stood to lose way more if the company succumbed to liquidation at the time.
Denis ran the balance sheet hard for too long, taking too much dividends in the process
O’Brien hired Citigroup in late 2020 to advise on a sale of Digicel’s Pacific operations after receiving uninvited approaches for the least-indebted part of the group. It would agree to sell the business late the following year to Australian peer Telstra in a deal worth as much as $1.85 billion, part-funded by the Australian government, which was fearful of the assets falling into Chinese hands at a time of heightened geopolitical tension between the countries.
Digicel moved quickly on completion of the deal last July to use most of the initial $1.3 billion of proceeds to redeem senior secured bonds that were scheduled to mature in 2024. There may have been a hope the company could use that debt-lowering deal to approach the market to refinance $925 million of bonds that was rapidly approaching their maturity date.
However, with markets turning uglier by the week, O’Brien was forced to open talks with key creditors towards the end of last summer.
While initial discussions were aimed at postponing repayments of the bonds, which were due on March 1st, a “deteriorating and unprecedented situation in Haiti since September 2022 led the company to shift its focus to a more holistic solution for the company’s capital structure”, it said in a statement this week.
The slump by Haiti into a political, economic and humanitarian crisis, after fuel subsidies in the country came to an end last September, prompted the group to warn in November that its Haitian earnings would slide by as much as two-thirds in the second half of its financial year to March, to as low as $25 million.
The Haitian dollar has also plunged by 30 per cent in the past year against the US dollar, the currency of Digicel’s financial reports and its debt.
Digicel has guided bond investors that earnings before interest, tax, depreciation and amortisation (Ebitda) for its current financial year to the end of March will fall by almost 5 per cent to about $700 million, stripping out the performance of the Pacific business for both years, according to sources. It has also signalled that it expects earnings to pick up next year, in the expectation that Haiti will recover somewhat and the company will reap the benefits of a fresh transformation programme, aimed at ultimately boosting revenues and reducing costs, that is now being planned.
However, Fitch, the credit ratings agency, sees the group’s operating performance remaining under pressure in the upcoming year.
The proposed debt restructuring will involve, according to sources, holders of bonds held by two subsidiaries – Digicel Limited and Digicel International Finance Limited – swapping almost $1.18 billion of notes for a direct initial 90 per cent equity stake in the operating business, according to sources.
The group of bond investment firms that are poised to take control include US-based PGIM, formerly Prudential Investment Management, GoldenTree Asset Management, and Contrarian Capital Management.
Investors in about €660 million of debt in the ultimate holding group at the top of Digicel’s complex corporate structure, Digicel Group Holdings Limited, will have to write off most of what they are owed. Many leading investors have money in a number of categories of bonds.
With markets turning uglier by the week, O’Brien was forced to open talks with key creditors towards the end of last summer
The proposed deal, outlined a little over a month before O’Brien turns 65, will mark a further shrinking in recent times of the empire he began to build three and a half decades ago.
In 2021, the one-time personal assistant to Tony Ryan, the late aircraft leasing legend and Ryanair founder, sold the Communicorp media group he’d set up in 1989 to secure the licence for Dublin radio station 98FM for a sum in the region of €100 million to Germany’s Bauer Media Group. By then, Communicorp’s stable included Spin FM, Newstalk and Today FM. O’Brien had transferred UK radio assets to a separate Isle of Man vehicle in 2017.
O’Brien’s foray into Irish print media was less fortunate. He shelled out an estimated €500 million-plus building up a 29.9 per cent holding in Independent News & Media (INM) between January 2006 and the end of 2013. He received just €43.5 million for his stake when INM was sold in 2019 to Belgium-based Mediahuis – crystallising a huge loss.
In the early 2010s, with the Irish economy on its knees after the property crash, O’Brien invested €230 million in the Beacon Private Hospital, fuel retailer Topaz, and building services group Siteserv. They all had substantial bank debt and, in the cases of Topaz and Siteserv, these debts were to the State-owned Irish Bank Resolution Corporation (IBRC).
The Topaz deal in 2013 saw O’Brien buy the company’s €300 million-plus of bank borrowings for half the original value and employ the type of debt-for-equity swap manoeuvre now underway at Digicel. He would sell the business for an estimated figure of as much as €450 million three years later to Canadian company Couche-Tard, with the deal including the Esso Ireland business Topaz had mopped up under him.
His remaining assets include Actavo (the renamed Siteserv), the Quinta do Lago golf resort in the Algarve in Portugal, the Camiral golf resort in northern Spain, a majority interest in the Beacon, Ballynahinch Castle in Co Galway and a collection of other real-estate interests.
“But it has to be very painful that it’s come to this at Digicel,” says the analyst that used to cover the company.
Other observers suggest he may be relieved, after years of trying to resolve Digicel’s debt problems. Owning a small percentage of something that should ultimately have value is better than 100 per cent of one wallowing deep in negative equity. A spokesman for O’Brien did not respond to efforts to secure comment.
Digicel will end up being put up for sale in the medium term by the creditors-turned-shareholders, according to bondholder sources. But first, it will need to see a stabilisation in Haiti, an improvement in foreign exchange rates between some of its main markets and the US dollar, and the benefits of the transformation programme coming through, they say.
The debt markets will also need to be friendlier than they are currently. “A buyer’s cost of finance, after all, will be key to valuation,” says one bond investment manager.