Approximately $700 million of new debt rated
New York, September 05, 2012 -- Moody's Investors Service has assigned a Caa1 rating to Digicel Group
Limited's ("Digicel" or "DGL") proposed $700
million senior unsecured notes due 2020. Net proceeds will be used
to repurchase the entire tranche of the DGL 9.125%/9.875%
senior PIK toggle notes due 2015 ($415 million outstanding) and
a portion of the 8.875% senior notes due 2015 ($1
billion outstanding) via tender offers. In addition, Moody's
affirmed Digicel's Corporate Family Rating (CFR) and Probability
of Default Rating (PDR), both at B2, and maintained the stable
rating outlook. In conjunction with the rating action, Moody's
affirmed the ratings on the existing DGL debt and on the existing debt
at Digicel Limited ("DL"), a wholly-owned subsidiary
of DGL. Digicel also maintains a $912 million senior secured
credit facility (cannot be drawn down further and matures 2017) at its
Digicel International Finance Ltd. ("DIFL") subsidiary, which
Moody's does not rate.
Moody's views the transaction favorably due to the elimination of
the PIK notes from the capital structure and extension of the 2015 debt
maturities, as well as the comparatively lower coupon on the new
notes, which will provide some modest interest expense savings.
Nonetheless, we expect that consolidated leverage at DGL following
the debt refinancing will remain under 5.0x on a Moody's adjusted
basis. Moody's believes Digicel will manage its adjusted leverage
at between 4.5x and 5.0x over the next two years,
given EBITDA expansion related to 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 will likely 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 rising
capital expenditures. In February 2012, DGL raised $250
million in a note offering at its DL subsidiary to finance acquisitions.
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 10.0x
levels following the recapitalization of the company's balance sheet in
early 2007, to current leverage of below 5.0x on a Moody's
adjusted basis.
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 (19% 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. Moody's expects
the impact will reduce DGL's EBITDA by roughly $25 million
per annum. A more than offsetting positive is the strong GDP growth
expected this year from Papua New Guinea (16% of revenue) and Haiti
(17% of revenue), in the range of 6% to 8%.
Digicel's very good liquidity supports the rating. We expect
that the company will end FY13 (ending March 31, 2013) with about
$550 million in balance sheet cash. In March 2011,
Digicel announced that America Movil ("AMX") will acquire its El Salvador
and Honduras businesses, while in return Digicel will receive America
Movil's entire Jamaica operations along with $355 million in cash.
The companies closed the first stage of the swap of Jamaica and Honduras
assets in November 2011, while continuing the final negotiations
with El Salvador regulators. DGL expects a formal response from
the regulatory authorities sometime in the second half of 2012.
Upon receiving approval, DGL will close the sale of its El Salvador
businesses and receive the remaining $305 million in cash it is
owed as part of the AMX assets swap.
Cash flow from operations on a Moody's adjusted basis continue to
demonstrate strong improvement rising to $533 million for the LTM
period ended June 2012 compared to $457 million in FY11.
However, Digicel produced negative free cash flow of $342
million during this LTM period, mainly due to high capital expenditures
(for Voilà Haiti network integration and 4G rollouts), a
$115 million dividend payment in FY12 and a $300 million
special dividend paid in June 2012. Moody's expects DGL to generate
solid free cash flow of about $100 million (before special dividends)
in FY13, as Papua New Guinea and Haiti contribute healthy cash flows.
Rating Outlook
Given the incremental debt taken on by Digicel earlier this year,
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 target leverage
lower than 4.0x debt to EBITDA (Moody's adjusted) and if
the operations continue to generate free cash flow in excess of 5%
of total debt (Moody's adjusted) on a sustainable 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) within 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.
Rating Assigned:
..Digicel Group Limited
$700 Million Senior Unsecured Notes due 2020 -- Caa1
(LGD-5, 83%)
Ratings Affirmed:
..Digicel Group Limited
Corporate Family Rating -- B2
Probability of Default Rating -- B2
$415 Million 9.125%/9.875% Senior Unsecured
PIK Toggle Notes due January 2015 - Caa1 (LGD-5, 83%)
$1.0 Billion 8.875% Senior Unsecured Notes
due January 2015 -- Caa1 (LGD-5, 83%)
$775 Million 10.5% Senior Unsecured Notes due April
2018 -- Caa1 (LGD-5, 83%)
..Digicel Limited
$510 Million 12% Senior Unsecured Notes due April 2014 -
B1 (LGD-3, 39%)
$800 Million 8.25% Senior Unsecured Notes due September
2017 -- B1 (LGD-3, 39%)
$250 Million 7% Senior Unsecured Notes due February 2020
-- B1 (LGD-3, 39%)
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 repurchase existing DGL notes and for general corporate purposes.
Moody's will withdraw the rating on the senior PIK toggle notes
upon full repayment.
Moody's subscribers can find additional information in the Digicel Credit
Opinion published on www.moodys.com.
The principal methodologies used in rating Digicel Group Limited was the
Global Telecommunications Industry Methodology 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 June 30, 2012 was $2.5
billion.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's Investors
Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's office
that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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
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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:
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Moody's assigns Caa1 to Digicel Group Limited's new senior unsecured notes, affirms B2 CFR; outlook stable
