With tightening liquidity, dwindling cash flow and debt estimated to be several times more than earnings, Digicel Group Limited stands to experience a default in the near term, credit rating firm Moody’s has announced.
As a result, Moody’s has downgraded the Group’s “probability of default rating” to Caa3-PD from Caa2-PD and issued a negative outlook.
In its rational, the ratings agency said the downgrade “recognises the higher likelihood of another default by Digicel in the near term, either in the form of a distressed exchange or through the non-payment of interests after the grace-period end.”
At the same time, Moody’s downgraded the senior secured rating of Digicel International Finance Limited (DIFL) to Caa1 from B3. All other ratings within the group remain unchanged.
The New York-based financial services company explained that on March 30, Digicel announced that it had deferred the payment of interests related to its Digicel Group One Limited (DGL1) and Digicel Group Two Limited (DGL2) notes, which were due on March 30 and April 1.
It said if Digicel did not pay these interests during the 30-day grace period, Moody’s would consider this a default.
“On April 1, Digicel also announced the commencement of offers to exchange existing debt of Digicel Limited (DL), DGL2 and DGL1 for various new securities. The offers aim to reduce Digicel’s leverage and imply a discount on existing debt instruments. If completed as proposed, Moody’s will consider the exchange offer as a distressed exchange, which is a default under Moody’s definition,” it explained.
Moody’s explained that the downgrade of DIFL’s ratings to Caa1 from B3 reflected the “tight liquidity situation of Digicel and the increased risk that DIFL’s debt is eventually dragged along in a restructuring transaction or default, even though DIFL’s debt is not currently among the debt instruments that the group has proposed to exchange”.
“Digicel’s Caa2 corporate family rating (CFR) reflects the group’s untenable capital structure and tight liquidity position. It also considers Digicel’s presence in emerging markets with a history of instability and exposure to adverse weather events, as well as its exposure to the risk of currency depreciation against the US dollar, especially in its three largest markets – Jamaica, Haiti and Papua New Guinea,” said Moody’s.
This downgrade action comes almost a year after the Bermuda incorporated company, which operates in 31 markets in the Caribbean and South Pacific regions, experience a major downgrade from Moody’s in July 2019.
The company, which provides a range of business solutions, cable TV and broadband as well as other related products and services, generated revenue of US$2.3 billion in the 12 months to December 2019.
The company said Digicel’s liquidity “is tight with the company still generating negative free cash flow and a cash balance which amounted to US$126 million as of December 2019. Digicel faces upcoming large debt maturities, the next maturity being the US$1.3 billion DL notes due April 2021, which are part of the announced exchange”.
“If the exchange is completed with full acceptance and under the terms announced, Digicel would be reducing its gross debt by USD$1.7 billion or about 25 per cent, and its leverage (gross debt /EBITDA) would decline to about 6 times (pro forma as of September 2019) from a level of 7.7 times.
“It would also extend its debt maturities, with no large maturity before 2024, and reduce cash interest expenses by US$125 million from a current annual amount of about US$500 million, which would help the company return to positive free cash flow generation and improve its liquidity position. At the end of the tender offer period, and once there is clarity on Digicel’s final capital structure, Moody’s will reassess Digicel’s CFR and PDR, and the ratings of its debt instruments,” it further explained.
Moody’s said the negative outlook reflects the still uncertain outcome of Digicel’s exchange offer and the risk that the company eventually goes through a restructuring process entailing higher losses for bondholders.
Moody’s said Digicel’s ratings could be upgraded if the company materially strengthened its capital structure and liquidity position, returning also to positive and stable free cash flow generation.
However, a further downgrade could happen in case of a restructuring process or default that results in higher than expected losses to creditors. (MM)