Moody’s Investors Service (“Moody’s”) on June 28 changed to negative from stable the outlook on the ratings of Digicel Group Limited (“Digicel”, “DGL” or the “company”) and Digicel Limited (“DL”) and assigned a negative outlook to Digicel International Finance Limited (“DIFL”).
At the same time, Moody’s has affirmed DGL’s B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR), as well as the B1 rating on the unsecured notes of DL and the Ba2 rating on the secured bank credit facilities of DIFL.
The change in outlook to negative reflects the company’s ongoing high leverage and the reduced runway available to the company to simultaneously improve its fundamental credit profile and address its large looming debt maturities with anticipation.
Affirmations
• Issuer: Digicel Group Limited
• Probability of Default Rating, Affirmed B2-PD
• Corporate Family Rating, Affirmed B2
• Senior Unsecured Regular Bond/Debenture, Affirmed Caa1 (LGD5)
• Issuer: Digicel Limited
• Senior Unsecured Regular Bond/Debenture, Affirmed B1 (LGD3)
• Issuer: Digicel International Finance Limited
• Senior Secured Bank Credit Facility, Affirmed Ba2 (LGD1)
Outlook Actions:
• Issuer: Digicel Group Limited
• Outlook, Changed to Negative from Stable
• Issuer: Digicel Limited
• Outlook, Changed to Negative from Stable
• Issuer: Digicel International Finance Limited
• Outlook, Assigned Negative
RATINGS RATIONALE
The change in Digicel’s outlook to negative reflects the company’s ongoing high leverage (gross debt to EBITDA), which amounted to around 6.7x for the 12 months to March 2018. While Moody’s expects that the recent tariff rebalancing implemented in some markets and the investments in upgrading its network in past years will contribute to the company returning to modest revenue and EBITDA growth during FY19, the decline in leverage will only be gradual.
Digicel faces large debt maturities, starting in 2020, with the first bond to mature a US$2 billion unsecured bond at DGL, followed by a US$1.3 billion bond maturity at DL in April 2021. The negative outlook also considers that the company’s currently weak financial profile is constraining the group’s refinancing options.
Digicel is considering inorganic transactions, such as asset sales, which could accelerate the reduction in net debt, but the timing and amount of related proceeds remain uncertain.
Digicel’s B2 CFR continues to reflect its product and geographic diversification, strong margins, and leading market positions. Digicel holds the number one market position in wireless telecommunications in 22 of its 31 markets.
Over the last several years, Digicel has expanded its service offering to diversify revenues across business solutions, cable TV and broadband and media distribution where growth rates have been higher than in mobile.
The B2 CFR is nevertheless constrained by Digicel’s high leverage and negative free cash flow in recent years, due to high capital intensity and interest costs. Digicel is also present in emerging markets with a history of instability and exposure to adverse weather events, and is exposed to the risk of currency depreciation against the US dollar.
In spite of some cash burn in the past year due to negative free cash flow, Digicel’s liquidity remains adequate for the next 12-18 months. Digicel had a cash balance of around US$155 million at March 31, 2018, as well as US$54 million available under its US$100 million revolving credit facility.
We anticipate that free cash flow will improve and at least reach breakeven in FY19, helped by a reduction in capital spending, and Digicel’s debt maturities are immaterial in FY19 (US$11 million). In addition, Digicel recently announced a sale and leaseback of towers: while the amount of proceeds is undisclosed, the company will keep them on balance sheet which will increase liquidity sources.
Digicel’s ratings could be downgraded if the company does not reduce debt to EBITDA (Moody’s adjusted) below 6x within the next 12 months or if the company does not refinance its large debt maturities with anticipation, at least 12-18 months before maturity. A weakening in the company’s liquidity profile would also trigger a downgrade.
Digicel’s ratings could be upgraded if the company showed continued restraint with respect to dividends and if leverage were on track to fall below 4x debt to EBITDA (Moody’s adjusted). A rating upgrade would also require Digicel to generate free cash flow in excess of 5% of total debt (Moody’s adjusted) on a sustained basis while maintaining very good liquidity.
The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Incorporated in Hamilton, Bermuda, Digicel is the largest provider of wireless telecommunication services in the Caribbean. The company operates in 31 markets in the Caribbean and South Pacific regions. In addition, the company provides a comprehensive range of business solutions, cable TV and broadband and other related products and services. The company also operates a wireless network in Panama through its 45% owner.
