Digicel’s bonds badly hit by market moves

O’Brien probably rues not taking advantage of favourable market conditions in January


Holding court in five-star Steigenberger Hotel Belvedere at the World Economic Forum’s annual conference in Davos in January, businessman Denis O’Brien had good reasons to be cheerful.

The International Monetary Fund had just upgraded its global growth forecasts for this year and next, as economies globally were going through the “broadest synchronised” upsurge since the start of the decade. Financial markets were riding high. And O’Brien’s Digicel telecoms group had just secured a lower interest rate on about $1 billion of terms loans from its banks.

Asked by The Irish Times whether he might take advantage of buoyant debt markets and go about an early refinancing of Digicel’s $2 billion of bonds that fall due in 2020, the businessman said he was “watching the markets”, that this was an option, but there were no imminent plans.

As he spoke, the bonds were trading above the price at which they were originally sold – or what’s known as par value – for the first time since O’Brien had pulled the flotation of the business in 2015.

Digicel, which operates in 32 markets across the Caribbean, Central America and Asia Pacific regions, had returned to “sustainable” earnings growth, the businessman concluded, as the effect of dollar strength against the currencies in some of its largest markets had begun to reverse, and investment in net technologies, markets and product offerings, were paying off.

The entrepreneur probably rues not taking advantage of favourable market conditions at the time to sell long-term debt and take out the 2020 notes. The bonds have since fallen to as low as 85 cent on the dollar this month, pushing the yield, or market interest rate, on the securities from 8 per cent to within a whisker of 16 per cent.

As bond prices have fallen globally in recent months and the dollar has staged a rally against other major currencies (amid concerns that US Federal Reserve will raise interest rates more aggressively than expected), emerging market and “junk-rated” – or high yield – dollar bonds have been particularly hit. Digicel’s bonds are both.

Company-specific issues

But investors have also been rattled by company-specific issues, including a weaker-than-expected set of results for the three months to the end of December (Digicel’s financial third quarter). This was mainly due to economic weakness in its key market in Papua New Guinea, delays in the signing of some contracts in its high-margin corporate solutions business, and the near-term impact on earnings from a push to get customers to use more data.

Analysts reckon that any chance of a refinancing of the 2020 bond in the near term are limited, with bond yields where they are.

Although saddled with a debt mount of about $6.5 billion (€5.4 billion), Digicel hasn’t had any major debt redemptions in recent years. However, maturities come thick and fast between 2020 and 2023, when a total of $5.2 billion of bonds fall due.

Digicel unveiled a transformation programme a little over a year ago, including a move to slash 1,500 jobs, or a quarter of its workforce, over 18 months, and the hiring of Chinese telecoms equipment group ZTE to upgrade its networks.

Digicel moved quickly this week to assuage concerns about ZTE, when the Chinese firm suspended all major operations. It follows US president Donald Trump’s administration introducing sanctions last month, preventing US companies from supplying parts to ZTE, after it was found to have violated US export restrictions by illegally shipping goods to Iran.

Digicel said on Thursday that much of the planned ZTE-related roll-out across its markets had already been completed and that it had “good optionality to complete all remaining markets” – understood to mean that could use alternative suppliers, if necessary.

Bad timing

Still, the whole episode couldn’t happen at a worse time, as O’Brien’s new chief executive at Digicel, Alexander Matuschka, who succeeded Colm Delves in February, prepares to take to the road later this month to meet bond investors and present his new management team and strategy. It also occurs at a time when O’Brien finds himself embroiled in a legal clash in Ireland between the Office of the Director of Corporate Enforcement and Independent News & Media, where he is the main shareholder.

O’Brien needs market sentiment to improve towards Digicel before he can float the business – which, he signalled at Davos, may be attempted as soon as next year.

However, he might be helped by an unlikely source. Executives at Digicel’s main competitor in the Caribbean, Liberty Latin America, which was recently spun off from John Malone’s Liberty Global, said this week that their duopolistic position across some markets may pay dividends.

“We think we have a very rational competitor in that space where we operate in,” Liberty Latin America chief executive Balin Nair told analysts on a conference call on Wednesday. “I think it’s a win-win for both of us if we can bring back some pricing power to the products that we have. I say that not because I think the sky is the limit on prices there. I think it truly is underpriced in a lot of these markets.”

With rivals like that, who needs friends?

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