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Rating Action:

Moody's assigns B1 to Digicel Limited's new senior unsecured notes, affirms Digicel Group Limited's B2 CFR; outlook stable

19 Feb 2013

Approximately $700 million of new debt rated

New York, February 19, 2013 -- Moody's Investors Service has assigned a B1 rating to Digicel Limited's ("DL") proposed $700 million senior unsecured notes due 2021. DL is a wholly-owned subsidiary of Digicel Group Limited ("Digicel" or "DGL"). Net proceeds will be used to repurchase the entire tranche of the DL 12% senior notes due 2014 ($510 million outstanding) via a tender offer and for general corporate purposes. In addition, Moody's affirmed Digicel's B2 Corporate Family Rating (CFR) and B2-PD Probability of Default Rating (PDR). In conjunction with the rating action, Moody's affirmed the ratings on the existing debt at DGL and DL. The rating outlook is stable.

Moody's views the transaction favorably due to the extension of the 2014 debt maturity and comparatively lower coupon on the new notes, which will reduce interest expense. Following the debt refinancing, Moody's expects consolidated leverage at DGL will remain under 5.0x total debt to EBITDA (Moody's adjusted). We believe Digicel will manage its adjusted leverage at between 4.5x and 5.0x over the next two years, given EBITDA expansion related to the continued success in growing its markets, particularly in the South Pacific territories, and increasing cash flow contributions from operations in Haiti and Papua New Guinea. Overall deleveraging is expected to be tempered by our expectation that the company could use debt funding to consolidate the remaining equity of its affiliate, Digicel Holdings Central America ("DHCAL"), that it does not already own, and for future acquisitions and capex.

Rating Assigned:

..Issuer: Digicel Limited

$700 Million Senior Unsecured Notes due 2021 -- B1 (LGD-3, 39%)

Ratings Affirmed:

..Issuer: Digicel Group Limited

Corporate Family Rating -- B2

Probability of Default Rating -- B2-PD

The assigned rating is subject to review of final documentation and no material change in the terms and conditions of the transaction as advised to Moody's. Digicel intends to use the debt offering proceeds to retire the existing DL 12% notes due 2014. Moody's will withdraw the rating on these notes upon full repayment.

RATINGS RATIONALE

Digicel's B2 CFR is supported by its leading position as the largest wireless telecommunications carrier in the Caribbean, as well as its successful track record at gaining significant market share and producing solid operating results relatively quickly after new markets are launched. The company's growing penetration in markets outside of its long-standing Jamaica base has resulted in quick deleveraging from roughly the 10.0x level following recapitalization of the balance sheet in early 2007, to 4.7x total debt to EBITDA (Moody's adjusted) as of December 31, 2012.

However, Digicel's history of debt funded acquisitions and sizable dividend payments, plus the likelihood that in the future DGL will acquire the portion of DHCAL that it does not currently own weigh down the rating. While the company continues to have strong diversification, this is mitigated by its exposure to Jamaica (about 18% of total revenue), which is struggling to revive its economy and experiencing competitive telecom pricing following the imposition of a new regulatory and tax scheme designed to increase government receipts. A positive offset is the robust GDP growth expected this year from Papua New Guinea (17% of revenue) and Haiti (21% of revenue).

Digicel's very good liquidity supports the rating. We expect that the company will end FY14 (ending March 31, 2014) with cash balances near the levels at December 31, 2012 (roughly $353 million). Cash flow from operations on a Moody's adjusted basis continue to demonstrate strong improvement rising to $544 million for the LTM period ended December 2012 compared to $525 million in FY12. However, Digicel produced negative free cash flow of $186 million in the LTM period, mainly due to high capital expenditures (for Voilà Haiti network integration and 4G rollouts) and a $300 million special dividend paid in June 2012. Moody's expects DGL to generate solid free cash flow of about $100 million (after dividends) in FY14, as Papua New Guinea and Haiti contribute healthy cash flows. Digicel also maintains a $893 million unrated senior secured credit facility (matures 2017) at its Digicel International Finance Ltd. ("DIFL") subsidiary, however there are no further draws available under this facility.

Rating Outlook

Given the incremental debt incurred as a result of this capital raise and the debt raised in February 2012, the stable outlook reflects Moody's opinion that despite continuing subscriber and cash flow growth, DGL is unlikely to drive debt to EBITDA leverage to below 4.0x (Moody's adjusted) over the rating horizon. The outlook also reflects Moody's view that over the next two years, the company could use debt to acquire more DHCAL equity from its principal shareholder, Denis O'Brien.

What Could Change the Rating - Up

Moody's could upgrade Digicel's rating if the company demonstrated a less aggressive dividend philosophy, financial policies targeted leverage lower than 4.0x debt to EBITDA (Moody's adjusted), and if the operations generated free cash flow in excess of 5% of total debt (Moody's adjusted) on a sustained basis while maintaining very good liquidity.

What Could Change the Rating - Down

The ratings could be downgraded if operational shortfalls or unexpected acquisitions/investments elevated Digicel's leverage above 6.0x debt to EBITDA (Moody's adjusted) over an 18 to 24 month horizon. The ratings will likely come under pressure if competition escalates in the company's core markets or if deterioration in the political, economic and regulatory environments in the Caribbean or South Pacific markets result in declining operating cash flows and weak liquidity.

Moody's subscribers can find additional information in the Digicel credit opinion published on www.moodys.com.

The principal methodology used in rating Digicel Group Limited was Global Telecommunications Industry published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Incorporated in Hamilton, Bermuda, with headquarters in Kingston, Jamaica, W.I., Digicel is the largest provider of wireless telecommunication services in the Caribbean. Revenue for the twelve months ended December 31, 2012 totaled $2.5 billion.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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.

Gregory A Fraser
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's assigns B1 to Digicel Limited's new senior unsecured notes, affirms Digicel Group Limited's B2 CFR; outlook stable
No Related Data.
© 2023 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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