Denis O'Brien's Digicel Group has started an unprecedented cost-cutting plan and hired financial consultants McKinsey and Goetzpartners to help cut its massive debt burden as the mobile phone group grapples with declining earnings.
Digicel's €6.2 billion debt is at "unsustainably high levels" at 6.2 times earnings at the group, Michael Chakardjian, an analyst with US credit research firm CreditSights, said at a conference in London this week. He also said that the company's cost-cutting plan was ambitious and opaque and that the company faces "near-term refinancing risks".
Digicel said on Friday that it “fundamentally disagrees with the conclusions”, and has a positive outlook.
The Irish Times reported on November 30th that Digicel executives had pitched a plan to investors and analysts earlier that month to cut its debt ratio to 4.5 times earnings before interest, tax, depreciation and amortisation (ebitda) by March 2019 as it sees profits finally rebounding in its next financial year after investing $2.3 billion (€2.2 billion) in its network over half a decade.
The Bermuda-based company, which operates in 32 markets in the Caribbean and South Pacific regions, is in the middle of a third year of earnings decline, with its latest quarterly figures, to the end of September, hit particularly by currency weakness in several of its markets against the dollar.
Mr Chakardjian said Digicel’s cost-cutting plan, known as Project Swan, includes “changing internal process and structure, such as back office functions and technology” and that management has never sought to extract savings from these measures before.
“Management has presented a plan which, if executed, would be fantastic. However, we see management’s plans to improve margins as opaque,” the analyst said.
“By their own admission, the company is trying to do something they have never done before, for example with their cost cutting plans, and other items are somewhat outside their control.”
Mr Chakardjian said the group’s debt level is so high that it has “no equity cushion” and that this “gives the company little wiggle room for poor performance and there is not an immaterial threat of distress in the event of poor results in key markets.”
He said that CreditSights “are positive on the company’s long-term position, but the near-term risks are increasing, which has led to us having an increasingly cautious view on the credit.”
While Digicel doesn’t have large debt maturities until the end of this decade, it has $291 million of loans maturing in the year to March 2018.
“Digicel’s liquidity position has weakened, which brings increasing concerns with the company’s near-term refinancing needs,”he said.
A spokesman for Digicel said: “Digicel fundamentally disagrees with the conclusions of the report. Digicel’s outlook remains positive with robust plans to delever by monetising our network investment and through realistic cost management initiatives.”
In October last year, Mr O’Brien pulled an initial public offering of Digicel shares, in which the company was seeking to raise as much as $2 billion to help lower its debt mountain, expand operations and list on the New York Stock Exchange. Digicel blamed volatility in global markets at the time.
The businessman, who founded the group in 2001 in Jamaica, a year after he received €285 million from the sale of his shares in mobile phone group Esat Telecom to British Telecom, said in May that it would be another 12-18 months before he attempted another initial public offering.
Earlier this year, it emerged that Mr O’Brien had started to waive a $10 million a quarter cash dividend in the second half of 2015 and that he had promised lenders he would not take further payments until business improved.