Denis O’Brien forced to lift hood on Digicel in debt restructuring

Denis O'Brien, who extracted at least $1.9 billion (€1.7 billion) in dividends from his Digicel phone group between 2007 and 2015, promised bondholders in the highly-indebted company four years ago that he would hold off taking further dividend payments until business improved.

Still, companies owned and linked to the businessman received almost $134 million of revenues, fees and expenses in the 3½ years through last September from the Jamaican-based group, new documents reveal.

Filings made by Digicel units to the US Securities and Exchange Commission (SEC) late last week in relation to a planned massive debt restructuring by the group give the first publicly-available overview of the business since it was planning a flotation half a decade ago.

The new documents show that O'Brien's engineering services company Actavo, previously known as Siteserv, received $83.1 million during the 3½ year period from Digicel to install a fibre-optic network and maintain other facilities, priced at cost plus an undisclosed mark-up.

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The group also paid $28.3 million to use a jet owned by an O'Brien company over the time frame, $3.9 million of annual rent on its Kingston headquarters, as well as fees and expenses to the businessman's Island Capital and Communicorp companies.

Digicel, saddled with an unsustainable debt pile of more than $7 billion, announced in early April that it was asking five categories of bondholders to write off much of what they are owed by exchanging their securities for paper of lesser value. The plan, which is being overwhelmingly supported by holders of the bonds for fear that they would face much bigger losses in the event of an insolvent liquidation, will see $1.6 billion of its debt being written off.

The group, which has not made detailed financial disclosures since it abandoned an initial public offering (IPO) in 2015, has been forced under 1939 US bond laws to post filings with the SEC in relation to one of the new bonds being issued in the planned debt exchange.

The documents provide extensive disclosures on the business, including details of almost $700 million of losses racked up in recent years as it dealt with growing completion, political and economic instability and currency fluctuations in some of its main markets, as well as rising debt-financing costs.

Liquidation analysis

They also provide the outline of a liquidation analysis by KPMG for a holding company, called Digicel Group Limited 1 (DGL1), sitting above its operations in the Caribbean, Asia Pacific and Central American regions. This company is described as currently being "unable to pay its debts on a cash-flow basis and is balance-sheet insolvent".

However, the KPMG analysis concludes that an assets firesale in the event of an insolvent liquidation would only raise between $484.7 million and $629.3 million, almost entirely from the sale of the Pacific unit. This would only have led to a partial recovery for senior unsecured creditors over three years as DGL1’s unsecured bondholders faced wipeout.

The alternative being pursued, a complicated consensual deal with bondholders – being carried out by a so-called scheme of arrangement – will result in DGL1 and a company above it being wound up. A new holding company, called Digicel Group 0.5 Limited (DGL0.5), will effectively taking over the main operating businesses.

Provisional liquidators to DGL1 were appointed in Bermuda at the end of April to give effect to the plan. As a result, this company also filed for Chapter 15 bankruptcy recognition in the US courts in recent days. This is merely a procedural move that was highlighted when the debt restructuring was first unveiled early last month and has no impact on the day-to-day operations.

“The proposed restructuring has been formulated on the basis of extensive negotiations with [a group of bondholders], with the objective of treating all stakeholders fairly and in accordance with their respective legitimate expectations and following a comprehensive consideration of the strategic options available to the company,” Digicel said in one of the SEC filings.

“The scope of feasibility of these options have been limited as a result of confidence in the company being undermined due to successive years of net losses and recent unprecedented market turbulence occurring as result of the Covid-19 pandemic, the duration of which remains unclear.”

The group has spent $6 billion developing its networks over almost two decades across 32 markets, funded by a particular type of debt: junk bonds, which carry higher interest rates than those that apply to what credit-ratings firms call investment-grade debt.

‘Material weakness’

Among the myriad of disclosures in the SEC documents are details of a “material weakness” in the company’s internal control over financial reporting that was identified in 2018 following the outsourcing of certain reporting services.

“This material weakness related to certain backlogs in transaction processing and reconciliations resulting from updates to Digicel’s finance and accounting systems in connection with a transition to a new operating model,” the filings said, adding that the company had since moved to address the issue and had taken a $24 million charge in its 2019 accounts after carrying out “a balance-sheet remediation exercise”.

The filings also shed light on the particular financial difficulties of the company behind Digicel’s Panama operations, Digicel Holdings (Central America) Limited (DHCAL), in which the group holds an almost 45 per cent stake and O’Brien personally has a 51.9 per cent interest.

O’Brien stopped providing finance to DHCAL in 2011 and, as of last September, it had $590.3 million in loans from the wider group. Digicel currently does not see these loans being repaid in full and has taken large impairment charges against them – valuing its total investment in DHCAL for accounting purposes at $35.9 million.

Digicel, in which O’Brien owns a 99.9 per cent stake, saw signs of revenue and earnings stabilisation during the course of 2019 calendar year – following years of decline – as data revenue growth in the mobile division offset a decline in voice revenues and its business solutions and cable television and broadband unit continued to growth from a low base.

O’Brien and holders of Digicel debt following the restructuring will be hoping that this trend will continue.