Digicel South Pacific unit may hold key to $2bn refinancing

Corporate restructuring involving debt-free unit could raise funds to buy back bonds

Denis O'Brien's Digicel Group may be able to take advantage of the discounted price at which $2 billion (€1.7 billion) of its bonds are trading, through a corporate restructuring that could raise funds to buy back the bonds on the cheap, according to a new research report.

A report issued to clients this week by Xtract Research, a New York-based debt research firm, said the group's debt-free Digicel Pacific Limited unit may hold the key to a refinancing of the bonds, which are due in 2020, at a price below their par value.

Such a move would lower the group’s borrowings, which currently stand at about $6.6 billion.

Digicel's complicated corporate structure has Digicel Group Limited at the top of the chain. This entity is behind the $2 billion of bonds that are due to be redeemed in two years' time. The notes are currently trading at 70 cent on the dollar in the market, reflecting how emerging-markets debt has fallen out of favour with global investors this year, as well as concerns over Digicel's ability to refinance the debt well ahead of their due date.

Xtract Research analyst Nicole Green said in her note that an option could involve Digicel Group selling its Digicel Pacific Limited unit to a sister company called Digicel Limited, which owns Mr O'Brien's Caribbean business.

While Digicel Limited has $2.23 billion of bonds and $1.35 billion of bank debt outstanding and is highly leveraged in its own right, Ms Green has suggested that the unit could use the earnings boost from a Digicel Pacific Limited takeover to raise additional financing.

Below-par offer

However, instead of sending the proceeds up to the parent Digicel Group, Digicel Limited could offer the new notes “as consideration in a below-par tender offer on the outstanding 2020 notes”, the analyst said.

Ms Green was unable, through a spokeswoman, to provide an estimate for the value of Digicel Pacific Limited, home of the group’s traditionally most profitable market of Papua New Guinea.

The most recent set of publicly-available results, contained in filings with US financial market regulators relating to Digicel’s abortive flotation plans that year, show the Papua New Guinea operation delivered earnings before interest, tax, depreciation and amortisation (ebitda) of $240 million in the year to March 2015 on $500 million of revenue.

A spokesman for Digicel declined to comment. However, it is understood that the company is committed to reducing its debt burden to 5.7 times ebitda by the end of March next year from 6.7 times in March 2018.

The Irish Times has previously reported that this will be driven by $500 million of asset sales – including the disposal of 450 wireless communications towards across the Caribbean by the end of September – and an expected 10 per cent increase in ebitda to $1.1 billion.

Digicel’s main hope is the delivery on this plan will lift the value of the 2020 bonds, allowing it to refinance the debt well ahead of schedule through the issuance of fresh group debt.