Fitch Rates Digicel's Proposed USD865MM 2022 Notes 'B-/RR5(EXP)'

Wed Mar 19, 2014 10:13am EDT

(The following statement was released by the rating agency) CHICAGO, March 19 (Fitch) Fitch Ratings has assigned a 'B-/RR5(EXP)' rating to Digicel Group Limited's (DGL) proposed USD865 million senior notes due 2022. Proceeds from the issuance are expected to be used to fully redeem its USD775 million 10.5% senior notes due 2018 and to pay for a tender premium for such redemption, as well as the associated accrued interest. The 'B-/RR5(EXP)' rating for the proposed notes, a notch lower than the company's Issuer Default Rating (IDR) of 'B', reflects the proposed notes' structural subordination to liabilities of DGL's subsidiaries, none of which will guarantee the notes, as well as its below-average recovery prospects in the event of default. Securities rated 'RR5' have characteristics consistent with securities historically recovering 11%-30% of the principal and related interest. Key Rating Drivers: DGL's ratings reflect its solid performance and cash from operations (CFO) generation, geographic diversification with a leading market position, strong brand recognition, as well as Fitch's expectation for stable credit metrics over the medium term. The ratings are tempered by its high leverage and the exposure of its operations to low-rated countries. Stable Operating Trends: DGL has generated stable operating results in the first nine months of fiscal year 2014 (FY2014), ending on March 31, 2014, and Fitch expects this trend to continue over the medium term. The company's constant-currency-based revenue posted modest growth of 3% with its EBITDA margin improving to 45% from 44% during the past year. This was mainly driven by increasing data revenue supporting ARPU, a decline in churn rates, as well as strong growth in Papua New Guinea (PNG) and Trinidad & Tobago. Increasing Data Revenue: Fitch expects revenue contribution from data-based value-added services (VAS) to continue to steadily increase over the medium term, mitigating negative pressures on traditional voice service. Positive trends in VAS have supported revenues and EBITDA growth over the past few quarters, offsetting pressures from traditional voice services due to reductions in mobile termination rates (MTR) in some markets, as well as a high level of competition. For the quarter ended Dec. 31, 2013, VAS accounted for 26% of service revenues, improving from 23% a year ago. Increasing smartphone penetration, which stood at 20% at Dec. 31, 2013 from 13% at Dec. 31, 2012 should continue to support this trend. Strong Growth in Papua New Guinea: PNG continues to grow strongly, offsetting weak growth in other major countries of operation, such as Jamaica and Haiti. In the third quarter ended Dec. 31, 2013, the local-currency-based revenue in PNG grew by 11% on a year-on-year basis, mainly supported by 49% increase in non-SMS data revenue. In addition, Fitch forecasts a steady expansion of the subscriber base in the country, which grew by 7% compared to Dec. 31, 2012, as penetration rates are still low at only 41%. In the first nine months of FY2014, PNG accounted for 17.7% of the total group revenue, based on USD, which was the second largest behind Haiti (18.9%). Negative FCF in FY2014 and FY2015: Fitch forecasts that DGL will generate negative free cash flow (FCF) in FY2014 and FY2015 due to high capex and dividends, despite stable performance. In those two years, annual capex is expected to increase to between USD470 million and USD500 million, from USD360 million in FY2013, due to network expansion, including a new tower project in Myanmar. In addition, the company paid a special dividend of USD650 million in February 2014. However, Fitch believes that FCF generation could turn positive from FY2016 as expansionary capex falls in the absence of any sizable special dividend. The capex-to-revenue ratio is expected to trend towards 10% with a stable annual dividend policy of USD40 million in the next few years. Leverage to Remain Stable Fitch expects the company's financial leverage to remain stable over the medium term given its high cash balance. Despite forecasted negative FCF and some pending investments, its cash balance of USD1.5 billion at Dec. 31, 2013 (pro forma USD850 million after special dividend of USD650 million paid in February 2014) should comfortably cover any shortfall from CFO without any significant need for external financing. Therefore, Fitch does not foresee any material increase in the company's gross debt level, which was USD6.1 billion at Dec. 31, 2013. Fitch expects the company's debt-to-EBITDAR ratio to remain at around 5x over the medium term. In addition, The company's liquidity will remain solid as it does not face any significant maturity until 2017. RATING SENSITIVITIES: A negative rating action could be triggered if consolidated leverage at DGL approaches 6.0x. While refinancing risk was reduced with the recent note issuances, inability to refinance in advance of the sizeable bullet maturities in the medium- to longer-term could pressure credit quality. A positive rating action could be considered in case of a sustained reduction in consolidated gross leverage to 4.0x or below, and an increase in FCF generation. Under Fitch's approach to rating entities within a corporate group structure, the IDRs of DGL, Digicel Limited (DL) and Digicel International Finance Limited (DIFL) are the same at 'B' and are assessed on a consolidated basis given the strong linkage between parent and subsidiaries. Fitch currently rates DGL and its subsidiaries DL and DIFL as follows: DGL --Long-term IDR at 'B' --USD 2.0 billion 8.25% senior subordinated notes due 2020 at B-/RR5'; --USD 775 million 10.5% senior subordinated notes due 2018 at 'B-/RR5'. DL --Long-term IDR at 'B'; --USD 800 million 8.25% senior notes due 2017 at 'B/RR4'; --USD 250 million 7% senior notes due 2020 at 'B/RR4'; --USD 1.3 billion 6% senior notes due 2021 at 'B/RR4'. DIFL --Long-term IDR at 'B'; --Senior secured credit facility at 'B+/RR3'. Contact: Primary Analyst Alvin Lim, CFA Director +1-312-368-3114 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst John Culver, CFA Senior Director +1-312-368-3216 Committee Chairperson Daniel Kastholm, CFA Managing Director +1-312-368-2070 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com' Applicable Criteria and Related Research: --'Corporate Rating Methodology', Aug. 05, 2013; --'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' - Nov. 20, 2013; --'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)', Aug. 05, 2013. Applicable Criteria and Related Research: Parent and Subsidiary Rating Linkage here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers here Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.