As Ireland struggled to recover from the crash, bond guru Michael Hasenstab of Franklin Templeton snapped up billions of euro worth of the State's bonds, becoming one of its biggest backers and turning a massive profit.
Ireland, he said, was “the investment of the decade”.
After winning big on the country, Hasenstab has now emerged as a major backer of Ireland’s richest man, Denis O’Brien.
Digicel, O’Brien’s Caribbean telco, which last week signalled its intention to list on the New York Stock Exchange, has bond debts approaching $6.5 billion (€5.9 billion). Hasenstab’s funds have gobbled up a massive chunk.
According to recent filings by the Templeton Global Total Return bond fund, it holds Digicel bonds with a market value of $800 million (€721.3 million).
Hasenstab has made a big bet on O’Brien’s ability to transform Digicel from a pure regional mobile operator into a fully fledged, multiplatform telecommunications and entertainment company. Fixed-line and fibre are its future.
Such a transformation, however, will be expensive.
Digicel's capital expenditure last year was $650 million (€586 million). Ratings agency Fitch estimates the group will spend close to another $1 billion over the next 24 months. Digicel is at the reasonable limit of its borrowing capacity. Now it needs equity.
O'Brien is an old hand at the debt game. He was one of the biggest borrowers at Anglo Irish Bank, with loans of about €855 at one stage.
In recent years, Digicel has been a darling of the US high-yield corporate bond scene, as O’Brien has played the market to fund the company’s growth and take $1.3 billion in dividends off the table for himself in the last three years alone.
He has managed to tap some of the biggest bond investors in the world relentlessly. An International Monetary Fund report last October highlighted that almost one-third of Digicel’s debt was then held by the top five global buyers.
Holders of its debt include include Fidelity Investments and Goldman Sachs.
With some of the largest financial institutions in the world having already bought into O’Brien’s Digicel story through investing in its loan notes, the billionaire is now thought to be targeting many of the same institutions to buy its shares in its upcoming initial public offering.
O'Brien, Digicel's chairman, and other senior executives, such as chief executive Colm Delves, are expected begin targeting US institutional investors in coming weeks with a limited roadshow.
It is clear from the flotation documents that O’Brien will not give up control of the company – his shares will have 10 times the voting power of other investors. How much of its equity is he willing to give up, and how much is Digicel worth?
Digicel’s initial filing with authorities in New York says he is not currently looking for a payout and that the company aims to raise $200 million, although this is just a holding figure.
Based upon standard multiples of Digicel’s earnings and also the value of its main competitor, Cable & Wireless, it is estimated that Digicel is worth somewhere between $8 billion and $10 billion, including its $6.5 billion debt.
That gives O’Brien leeway to raise well over $1 billion, if he chooses, in the upcoming flotation expected in late autumn.
Sources, however, speculated that he may not release such a large chunk of its equity on to the stock market at first.
“It could be a bit of a ‘suck it and see’ approach,” said one.
The theory goes that if the first release of shares, possibly in October, is successful, O’Brien may let further tranches hit the market over time.
Before it was announced that the company was planning to float, Fitch released a note on Digicel in May that opined on the company’s high-octane balance sheet.
Fitch said its rating on Digicel was “tempered by [its] aggressive shareholder distributions, high leverage and concentration in countries with low ratings”.
The biggest among Digicel’s more than 30 markets include Jamaica, Haiti and Papua New Guinea.
Moody’s, another ratings agency, also pointed recently to Digicel’s exposure to Jamaica as a reason for caution. “Jamaica is struggling to revive its economy and experiencing competitive telecom pricing,” it said.But apart from the emergence of a resurgent Cable & Wireless as a competitive obstacle for Digicel as it tries to build its fixed-line business, currency depreciation in these markets is the biggest problem facing O’Brien’s company.
Digicel’s $6.5 billion debt is all denominated in US dollars, but the currencies in the three largest markets where it raises its revenues are falling against the greenback by up to 8 per cent annually.
Due to O’Brien’s astute playing of the bond bubble in the last two years – he has refinanced its most expensive debt at lower rates and pushed out most of the maturities beyond 2020 – Digicel it does not need to find huge chunks of dollars to repay its debts immediately.
Its annual financing costs, however, are still in dollars – $600 million last year alone. This is eating into Digicel’s free cash flow and its ability to fund independently its fibre rollout and to take on any new acquisitions.
By listing in New York and raising a large amount of dollars, O’Brien could take out some of its most expensive bonds, reducing its dollar-denominated annual interest repayments.
A $2 billion tranche of bonds, paying a hefty 8.25 per cent rate, matures in 2020 and O’Brien has a deadline of September next year to buy them back cheaply. Perhaps he will target those bonds with the flotation proceeds?
Equity investors tend not to get overly excited by IPOs designed purely to reduce a company’s leverage. They tend to want to see also a growth plan. Sources this week speculated that raising cash from the IPO to fund growth is as important to Digicel as debt reduction.
Cable & Wireless, the once-sleepy operator Digicel terrorised with a decade-long blitzkrieg across the islands of the Caribbean, is resurgent since it bought fast-growing cable operator Columbus in a $3 billion deal in March.
O’Brien, who had bid $2 billion, fought hard against the deal, predicting it would result in “near-100 per cent monopolies in fixed-voice, broadband, pay and cable TV and off-island submarine capacity” in some regions.
It went through anyway with a few divestments ordered.
Digicel recently bought up its own cable operations in six countries in the Caribbean region as well as a tranche of submarine fibre capacity. It is also engaged in a massive rollout of fibre-to-the-home in Jamaica, Trinidad and Tobago and Barbados.
Doug Brake, a telecoms policy analyst with a Washington think tank, recently wrote that these moves represented "smart expansions" for Digicel. He also dismissed the idea that the Cable & Wireless deal for Columbus is anti-competitive, as argued by O'Brien.
“[This] is exactly the type of effective competition that will continue to drive investment and economic growth in markets throughout the Caribbean for years to come,” said Brake.
There is no point having the fastest pipes around – the fibre – unless you have content to pour down them. As well as building out fibre services, which it will also use to launch an offensive on the business communications market, Digicel is also beefing up its content capabilities, such as entertainment and sports programming.
It recently signed a deal with Manchester City football club, for example, to provide it with tailored content for customers.
As Digicel grows its content capabilities, it may eventually look to open or acquire a broadcasting arm for the group. That, too, will require cash. The flotation will give it the means to raise it.
Brake told The Irish Times he doesn't think Digicel's IPO "signals much of a change in strategic direction" for the company. "The offering is clearly structured such that O'Brien retains virtually all control and decision-making power . . . This is another way to raise money for a burgeoning enterprise that's already pretty leveraged, even by telecoms standards," he said.
O’Brien has played the debt game with Digicel – and played it well. But that game now appears to be over. Digicel will come under an altogether different level of scrutiny in future as it opts for the equity game on the New York stock exchange.
A new era for the company, and for O'Brien, awaits. Debt adventures: Paul Coulson & Ardagh O'Brien is not the only Irish business luminary gearing up for a flotation.
Paul Coulson, the suave financier behind the Ardagh packaging group, last week also filed papers with the New York Stock Exchange indicating an intention to float its metals division, which is housed in an entity called Oressa. The move will raise €2 billion in debt and equity for the unit.
Coulson, once a keen rival of Seán Quinn’s in the glass-bottling business, has played the debt markets relentlessly for several years as he has built up Ardagh. It has used the funds to make a number of blockbuster acquisitions.
The buying spree began in 2010 when it entered the metals business, doubling the size of the packaging group. It spent more than €3 billion on a large number of debt-fuelled acquisitions over the following two years. It then purchased Verallia North America from St Gobain last year for $1.7 billion.
The group now has debts of more than €5.2 billion, and the proceeds of the metals unit flotation will be used to reduce its debt pile. Analysts have said they do not believe the cash will be used to fund any more acquisitions.
Like O'Brien, Coulson's timing with the flotation looks to be good. Debt adventures: Gary McGann & Smurfit While Digicel and Ardagh have timed their debt binges and subsequent flotations well, others did not have such luck.
Having delisted from the market and with Gary McGann at the helm, the Smurfit packaging group rode the wave of cheap debt that was a feature of the Celtic Tiger years, snapping up acquisition targets and generally growing like a hipster’s beard.
In 2005, it linked up with the Dutch Kappa packaging group and, carrying an enormous debt burden, prepared for a flotation in early 2007. Its timing could scarcely have been worse.
It floated at €16.50 a share and quickly rose to over €20. Then came a little thing that became known as the credit crunch, and debt went out of fashion.
Smurfit Kappa’s share price started tanking in the summer of 2007. Turning into 2008, the group’s debt pile was approaching a monstrous €6 billion. Its share price continued falling until it hovered barley above €1.
McGann, who, let’s not forget, served on the board of Anglo Irish Bank when it collapsed, has described it as “the absolute lowlight of my career”.
Since then, however, the company has cleaned up its mess. It has worked hard on reducing its debt pile and has achieved a turnaround in sentiment from investors. Debt adventures: Barry O'Callaghan & Riverdeep O'Brien and Coulson appear to have timed their debt adventures well and at least Smurfit Kappa got a chance to put its errors right. But perhaps the most egregious cases of an Irish debt-fuelled foray gone wrong is that of former investment banker Barry O'Callaghan and Houghton Mifflin Harcourt.
O’Callaghan founded and ran an educational publisher called Riverdeep, and was backed by Irish investors, many of whom were assembled by stockbroker Davy.
In 2006, Riverdeep merged with Houghton Mifflin in a highly-leveraged deal. A little over six months later, that transformational deal was followed by another, even bigger, wheeze.
It paid $4 billion to Reed Elsevier for its Harcourt education division, creating Houghton Mifflin Harcourt. The company, which racked up a debt pile of $8 billion, was then caught out by the credit crunch.
The company endured a number of debt-for-equity swaps in 2009 and 2010, wiping out O’Callaghan’s stake, and that of the Irish Davy investors who had followed him along the way.
O’Callaghan departed the group in 2011, and HMH entered chapter 11 bankruptcy in the US in 2012. It emerged debt-free and has since prospered.