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12 Jul 2005
MOODY'S ASSIGNS B1 LOCAL CURRENCY CORPORATE FAMILY RATING TO DIGICEL LTD; B3 FOREIGN CURRENCY RATING ASSIGNED TO PROPOSED US $250MM SENIOR NOTES WITH A POSITIVE OUTLOOK.
First Time Rating / $250 million of Debt Securities Affected.
New York, July 12, 2005 -- Moody's Investors Service today assigned a B1 local currency corporate
family rating (formerly known as the senior implied rating) to Digicel
Ltd. and a B3 rating to its proposed issuance of US $250
million of senior unsecured notes. The rating outlook is positive.
The B1 local currency corporate family rating reflects concerns that free
cash flow will be constrained in the near term as Digicel integrates recent
acquisitions and launches new markets, as well as Digicel's
limited financial flexibility due to its relatively heavy secured debt
amortization requirements, and lack of a liquidity facility.
The rating also reflects the emerging market risk associated with operating
in Jamaica and other Caribbean islands and the company's thin equity
capitalization after the repayment of shareholder contributions.
It is supported by very strong results from the company's primary
operating subsidiary in Jamaica, the similar success of Digicel's
growing operations in other Caribbean islands, the relatively low
leverage of the company as measured by total debt to EBITDA, and
Moody's opinion of the good free cash flow generating ability of
The rating outlook is positive reflecting Moody's opinion that the
ratings are likely to move higher as initial investments in new and acquired
markets subside and that cash flows should grow such that Digicel begins
to generate material free cash flows above its mandatory amortization
Digicel is a rapidly growing cellular telephone service provider in the
Caribbean islands of Jamaica, Barbados, St. Lucia,
St. Vincent, Grenada, Curacao, Aruba, and
the Caymans. While the company is currently preparing to launch
service in Trinidad and Tobago and has acquired a license for a GSM network
in Haiti, these operations will be undertaken by unrestricted subsidiaries
of the issuer and will not be a part of the credit base supporting the
Digicel began its Jamaican operations in April 2001 as the second wireless
operator, and overtook the incumbent Cable & Wireless in terms
of total subscribers within 12 months. With over 1.4 million
subscribers in Jamaica, Digicel's market share is over 70%.
In the other islands where Digicel has launched, similar rapid subscriber
and market share gains have been achieved. Digicel recently agreed
to acquire Cingular's Caribbean wireless assets that will bring
important new markets to Digicel in Bermuda and Antigua and further diversify
the company's operations away from its reliance on Jamaica.
In the fiscal year ended March 2005, Digicel generated $165
million of adjusted EBITDA (adjusted to exclude share option buyback expenses),
with approximately 95% of that coming from Jamaica. Pro
forma for a full year of results from Curacao, EBITDA would have
been $176 million with 88% contribution from Jamaica.
The acquired Cingular operations are not currently EBITDA positive,
and Digicel plans to make significant, one-time operating
and capital investments to integrate these properties into Digicel's
existing operations. Due to these investments, Moody's
estimates significant free cash flow generation is likely to be deferred
until fiscal 2007. Debt will total $641 million after the
proposed transaction, resulting in total debt being 3.6 times
pro forma EBITDA.
Restraining the B1 corporate family rating is the company's thin
equity capitalization. Part of the proceeds from the proposed senior
notes offering will be used to repay shareholder equity contributions,
increasing the ratio of debt to total capital above 85%.
The B3 foreign currency rating (which is below Moody's B1 Jamaican
foreign currency country ceiling) on the senior unsecured notes of Digicel
Limited reflects their effective subordination of these notes to the obligations
of the company's subsidiaries, primarily in the form of $391
million of senior secured bank debt. This senior secured bank debt
represents over 50% of the company's total on-balance
sheet third-party debt.
To improve its credit profile, Digicel must successfully integrate
the Cingular properties and make them meaningful cash flow contributors
as mandatory amortization requirements materially increase in fiscal 2007,
totaling approximately US$ 60 million per year in FY07 and FY08.
Due to the significant overlap of the Cingular assets with existing Digicel
operations, Moody's believes Digicel should be able to improve
their profitability. Consequently, Moody's assigns
a positive outlook to the ratings signifying that the ratings are likely
to move higher within the next 18 to 24 months, should the acquired
Cingular operations generate a good return on investment, and if
Digicel can continue to increase EBITDA, expand EBITDA margin above
40%, and sustainably produce free cash flow in excess of
7% of its total debt.
The ratings are likely to face downward pressure should Digicel begin
to lose market share, if operational shortfalls (lower ARPU or higher
churn) reduce profitability, or should the company make significant
additional investments or acquisitions that defer material free cash flow
generation. Moody's notes that Digicel has a license to operate
in Haiti, but at this time has deferred plans to launch service
in that troubled country. The ratings also would face downward
pressure should Digicel's liquidity erode, pressuring its ability
to meet its secured debt amortization requirements.
Moody's perceives a high level of business risk for Digicel as so
much of the company's operations are located in developing economies,
and currency fluctuations could drive up the cost of servicing US dollar
denominated debt as the majority of the cash flows are generated in Jamaican
dollars. Therefore adverse regulatory and economic developments
(particularly devaluation of the Jamaican dollar versus the US dollar)
in Digicel's operating environments would also likely have a negative
Moody's analysis is based upon Digicel's most recent audited
financial statements for the period ending March 31, 2004.
Moody's ratings are conditioned upon a review of audited financial
statements for the period ending March 31, 2005, reflecting
results which substantially conform to the unaudited financial information
provided by management. The proposed new senior notes will be issued
under Rule 144A and will not be exchanged for SEC registered notes.
The ratings are subject to review of final documentation that is consistent
with Moody's understanding of the proposed transaction.
Digicel is the largest provider of wireless telecommunications in the
Caribbean with over 1.7 million subscribers and LTM revenues of
$477 million at March 31, 2005.
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
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