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Rating Action:

Moody's affirms Digicel's B2 rating, assigns Ba2 to new bank credit facilities

25 Apr 2017

New York, April 25, 2017 -- Moody's Investors Service, ("Moody's") has affirmed the B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) of Digicel Group Limited ("Digicel", "DGL" or the "company") following the issuance of bank credit facilities by its subsidiary Digicel International Finance Limited ("DIFL"). Moody's has assigned a Ba2 (LGD-1) rating, to DIFL's new $635 million term loan B, $100 million revolving credit facility and $300 million term loan A. The proceeds will be used to repay an $837 million credit facility at DIFL as well as for general corporate purposes. Moody's has also affirmed the B1 (LGD-3) rating on the unsecured notes of Digicel Limited ("DL") and the Caa1 (LGD-5) rating on the unsecured notes of DGL. The outlook remains stable.

Assignments:

..Issuer: Digicel International Finance Limited

....Senior Secured Bank Credit Facility, Assigned Ba2 (LGD 1)

Affirmations:

..Issuer: Digicel Group Limited

.... Probability of Default Rating, Affirmed B2-PD

.... Corporate Family Rating, Affirmed B2

....Senior Unsecured Regular Bond/Debenture, Affirmed Caa1 (LGD 5)

..Issuer: Digicel Limited

....Senior Unsecured Regular Bond/Debenture, Affirmed B1 (LGD 3)

Outlook Actions:

..Issuer: Digicel Group Limited

....Outlook, Remains Stable

..Issuer: Digicel Limited

....Outlook, Remains Stable

RATINGS RATIONALE

Digicel's B2 CFR reflects its product and geographic diversification, good margins, and leading market position. Digicel remains the largest wireless telecommunications carrier in the Caribbean holding the number one market position in 19 of its 25 Caribbean markets. Over the last several years, Digicel has expanded its service offering, mainly through M&A, to diversify revenues across business solutions, cable TV and broadband and media distribution since growth opportunities in these areas are now larger than in mobile. Digicel is undertaking a business transformation project that aims to reduce operating expenses by centralizing common support functions. The company expects to achieve significant headcount related expense savings and a working capital benefit from this project, which it has named "Project Swan." In addition, Digicel has entered into a five year agreement with ZTE for network equipment that it expects to result in more predictable capital spending.

Digicel's rating is constrained by its high leverage of approximately 6.5x (Moody's adjusted, 12/31/16) and aggressive financial policy, which includes frequent debt funded acquisitions and opportunistic dividend payments. Additionally, Digicel's ratings are negatively impacted by its negative free cash flow, despite high margins, due to high capital intensity and interest costs. Despite modest underlying growth in constant currencies, Digicel's reported revenue and EBITDA have posted year-over-year declines for the past seven quarters. Dollar strength has moderated in 2017 but currency translation risk may continue to negatively affect Digicel in the near term, especially in the company's three largest geographies: Jamaica, Haiti and Papua New Guinea.

Moody's views Digicel as having adequate liquidity and expects the company to have approximately $200 million in cash and full access to the new $100 million revolving credit facility issued by DIFL at the close of this refinancing transaction. Digicel generated negative free cash flow in both fiscal 2016 (ended 3/31/16) and fiscal 2017 (ended 3/31/17) due to elevated capex, but Moody's expects the company to reduce its cash burn in fiscal 2018 (ended 3/31/18) and approach breakeven. The company is in the final stages of network expansions/upgrades, fiber-to-the-home and cable expansions, upgrading acquired cable businesses, and 4G rollouts in the Caribbean and Pacific geographies. Moody's projects Digicel will continue to spend heavily on capex in FY18 but to a lesser degree due to the completion of capital initiatives and Digicel should transition to positive free cash flow in the FY18-FY19 period.

Digicel maintains a $150 million unrated senior secured credit facility at its Digicel Pacific Ltd. subsidiary due in August of 2017. Moody's believes a portion of the proceeds raised from the new credit facilities may be used to repay the upcoming maturity in addition to cash on hand. The credit agreement governing the new bank facilities has two maintenance-based financial covenants (applicable only to the TLA) and Moody's expects Digicel to have adequate cushion under these covenants over the next 12 to 18 months. Digicel's maturity profile offers a short runway for an improvement in leverage and cash flow before maturities ramp sharply in 2020, when $2.25 billion of debt matures ($250m at DL in Feb. '20 and $2.0b at DGL in Sep. '20). Beyond 2020 Digicel faces $1 billion or more in annual maturities through 2023. Moody's will assess the company's progress towards reducing these maturity towers during 2017 and 2018.

The ratings of Digicel's individual creditor classes reflect Moody's assessment of the average probability of default across the group and individual loss-given-default assessments of the debt classes. Moody's rates DIFL's senior secured credit facilities Ba2 (LGD-1) due to their senior position relative to the company's primary assets. Moody's rates senior unsecured notes issued by DL as B1 (LGD-3) due to their intermediate position in the capital structure and the loss absorption provided by the Caa1 (LGD-5) rated unsecured notes at DGL.

The stable outlook reflects Moody's view that Digicel will grow revenues and EBITDA such that Moody's adjusted debt to EBITDA will return below 6x and will be sustained under that level within the rating horizon.

Moody's could upgrade Digicel's rating 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 ratings could be downgraded if leverage is sustained above 6x debt to EBITDA (Moody's adjusted). Further, Digicel's ratings could be downgraded if the company does not make material progress addressing its large maturity towers by at least mid 2018 or if the company uses a material amount of cash for shareholder returns.

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% ownership interest in affiliate, Digicel Holdings (Central America) Limited. Moody's expects revenue of approximately $2.5 billion over the succeeding twelve months.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mark Stodden
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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