Denis O’Brien dials M for more time from bondholders owed $3bn

Digicel bond offer could give telco breathing space to prove it can rebuild earnings

Businessman Denis O'Brien may just have bought himself more time to reset Digicel Group and avert a potentially nasty stand-off with junk bond markets.

Founded by O’Brien in 2001, Digicel now spans 31 markets across the Caribbean and South Pacific and churns out annual earnings of about $1 billion (€859 million).

Problem is: it’s saddled with a $6.7 billion debt mountain as emerging-markets bonds are out of favour with global investors and the group is struggling to convince creditors that it can grow its income. Group earnings before interest, tax, depreciation and amortisation (ebitda) has contracted 17 per cent from a peak $1.2 billion in the year to March 2015.

Currency weakness across some of the main countries in which it operates, economic malaise in its key Papua New Guinea market, and declining voice and data revenues across its 13.9 million-strong mobile customer base have conspired to reduce Digicel’s earnings in recent years.


O’Brien has taken action, moving last year to cut almost a quarter of its then 6,000-strong workforce and slashing investment. The company has said it is on the verge of really driving mobile data income as customers move increasingly on to fourth-generation (4G) services.

Digicel is targeting a drop in its debt burden to 5.7 times ebitda next March from 6.74 in March this year, premised on boosting earnings by 10 per cent to $1.1 billion and selling off up to $500 million of assets.

So far, however, we’ve seen little delivery. Results published this week show ebitda fell 2 per cent in the first quarter, while it is only set to raise $145 million from mobile tower sale in the Caribbean and South Pacific by the end of December.

With investors and credit ratings agencies signalling mounting concerns over Digicel’s ability to refinance $2 billion of bonds that mature in two years’ time, O’Brien moved on Friday to offer holders of these notes a swap for similar securities that would fall due in 2022. Digicel is also seeking to exchange $1 billion of bonds that are due in 2022 for new 2024 notes.

The move would buy O’Brien more time to prove Digicel can rebuild earnings. If he held out until closer to the maturity of the 2020 bonds before seeking to refinance, the greater the risk of an investor stand-off.

While there had been a view O’Brien would seek to take out the 2020 bonds at a discount, as they were changing hands at 66.7 cents on the dollar earlier this week. But by offering up to full value – albeit by way of more bonds, rather than cash – investors holding a number of different categories of Digicel debt may be more inclined to accept. After all, they have more skin in the game.

Recent buyers of Digicel’s 2020 bonds, as they commanded a market interest rate – or yield – of more than 30 per cent, may be less inclined as they are being offered notes with an 8.25 per cent coupon.

The offer may give Digicel breathing space, but credit ratings agencies are likely to see it as little more than a can-kicking exercise. Expect more downgrades.

Irish taxpayers lose as regulators fight last crisis

Permanent TSB (PTSB) chief executive Jeremy Masding is often often visibly peeved when reporters and analysts focus on the challenges facing PTSB, rather than giving his team credit for what it has achieved despite the odds.

This week proved no exception as the market looked beyond a robust set of results – with profit up 33 per cent on the year – to focus on a European Central Bank (ECB) review of the riskiness of its loans that will result in bigger-than-expected dent in PTSB's capital ratios.

The review of the euro zone bank’s models means PTSB will have to recognise a total of €3.4 billion of additional risk-weighted assets against which it must hold capital.

This has a direct bearing on how much taxpayers can recover from the €29.3 billion bailout of the three banks that survived the financial crisis.

The more money lenders must hold, the less the State stands to recover – either because it limits the return of “excess” capital to shareholders (still mainly the Government), or the price the market is willing to pay for taxpayers’ remaining bank stakes.

Deutsche Bank analysts estimate PTSB has been given one of the highest risk weightings for its assets in Europe. On the face of it this might make sense, as 28 per cent of the bank’s loans were non-performing a year ago.

However, it has been reducing this ratio at pace, aided by loan sales. Meanwhile, most of PTSB’s remaining borrowers have come through the worst downturn in the history of the State and kept up to date with payments. Virtually all of the loans issued since 2012 are meeting their terms.

Irish banks have fared worse than most under the ECB review – but PTSB has most affected. A classic case of regulators fighting the last crisis?