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Rating Action:

Moody's assigns B1 rating to DIFL's new senior secured notes; stable outlook

06 Mar 2019

New York, March 06, 2019 -- Moody's Investors Service (Moody's) today assigned a B1 (LGD1) rating to the proposed USD550 million senior secured notes due 2024 to be issued by Digicel International Finance Limited (DIFL) and Digicel Holdings (Bermuda) Limited. The Caa1 corporate family rating (CFR) of Digicel Group Limited (Digicel), as well as the ratings on all existing debt instruments within the group, remain unchanged. The outlook on all ratings is stable.

The rating of the proposed notes assumes that the final transaction documents will not be materially different from draft legal documentation reviewed by Moody's to date and that these agreements are legally valid, binding and enforceable.

RATINGS RATIONALE

The transaction consists of new USD550 million senior secured notes due 2024 to be issued by DIFL and Digicel Holdings (Bermuda) Limited, which proceeds will be used (1) to repay the drawings under DIFL's USD100 million revolving credit facility (RCF) (fully drawn currently); (2) to repay all of the existing USD300 million term loan A at DIFL; (3) to pay transaction-related fees and expenses; and (4) for general corporate purposes. On February 26, Digicel entered into an amendment to the existing DIFL credit agreement to increase the maximum total debt to adjusted EBITDA maintenance covenant ratio from 4.5x to 5.0x. This amendment, which is conditioned on the repayment of at least 50% of the term loan A and of all of the drawings under the RCF by April 30, 2019, would become effective concurrently with the closing of the proposed senior secured notes transaction.

If USD550 million are issued, the transaction would slightly increase total debt, by around USD150 million, increasing the ratio of total debt to adjusted EBITDA, as per DIFL's credit agreement definition, to 4.59x from 4.42x (as of December 2018) pro forma for the considered transaction. At the same time, the transaction would eliminate debt amortizations related to the term loan A (assuming it is fully repaid) and provide DIFL with around USD140 million additional cash, which could be distributed to DIFL's parent companies and alleviate somewhat the group's liquidity pressures. The covenant waiver would also become effective.

The new notes will have terms substantially similar to those of the existing DIFL secured credit facility, which comprises a USD300 million term loan A, an outstanding USD1,044 million term loan B and a USD100 million RCF. In particular, the new notes will be guaranteed by each of DIFL's subsidiaries that is a guarantor or obligor under the DIFL secured credit facility and will be secured by a first-priority lien on the same collateral as that of the existing DIFL secured credit facility.

The B1 rating on the new notes is aligned with the ratings of the existing DIFL debt instruments and three notches above the Caa1 CFR of Digicel, reflecting the notes positioning in the waterfall ahead of the debt instruments at Digicel Limited, Digicel Group One Limited, Digicel Group Two Limited and Digicel Group Limited.

Digicel's Caa1 CFR continues to reflect its high leverage and untenable capital structure, with the company facing large debt maturities in the coming years, and its weak liquidity profile. While Digicel benefits from product and geographic diversification, leading market positions and high operating margins, it is present in emerging markets with a history of instability and exposure to adverse weather events and currency depreciation. In addition, the group's operating performance continues to be affected by revenue and earnings declines and negative free cash flow.

Digicel's liquidity has been weakening for several quarters, with negative free cash flow resulting in a decline in the company's cash balance (USD96 million at December 2018) and the full drawing of its revolving credit facility, while the increase in leverage resulted in tight leeway under its financial covenants. If Digicel cannot issue at least USD250 million, the covenant waiver will not become effective and covenant leeway will continue to be very tight. At December 2018, DIFL's total debt to adjusted EBITDA ratio was 4.42x against a limit of 4.5x.

The stable outlook reflects Moody's expectations that Digicel will gradually return to positive free cash flow, resulting in some improvement to its financial and liquidity profile.

Digicel's ratings could be downgraded if the company's liquidity continues to weaken, it does not refinance its debt maturities well ahead of time, its free cash flow remains negative, or if its debt to EBITDA (Moody's adjusted) ratio does not improve, increasing the likelihood of some form of debt restructuring.

Digicel's ratings could be upgraded if the company's liquidity improves and its leverage declines, driven by a clear improvement in its operating performance, a return to positive free cash flow generation and the completion of asset sales.

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. Digicel generated revenue of USD2.3 billion in the 12 months to December 2018.

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.

Marie Fischer-Sabatie
Senior Vice President
Corporate Finance Group
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Marianna Waltz, CFA
MD - Corporate Finance
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© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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