New York, August 31, 2018 -- Moody's Investors Service ("Moody's") today downgraded Digicel
Group Limited's ("Digicel") corporate family rating (CFR) to Caa1
from B2, as well as its existing debt instruments (see list of affected
ratings below). The downgrade follows Digicel´s announcement
of an offer to exchange its outstanding 2020 and 2022 notes for new 2022
and 2024 bonds and reflects the company's untenable capital structure.
At the same time, Moody's assigned a rating of Caa2 to the
aforementioned new senior unsecured notes due 2022 and 2024.
If completed as proposed, Moody's will consider the exchange
offer as a distressed exchange, which is a default under Moody's
definition, and therefore downgraded Digicel's probability
of default rating (PDR) to Caa3-PD. The outlook on all ratings
is stable.
Downgrades:
..Issuer: Digicel Group Limited
.... Probability of Default Rating,
Downgraded to Caa3-PD from B2-PD
.... Corporate Family Rating, Downgraded
to Caa1 from B2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Caa3 (LGD5) from Caa1 (LGD5)
..Issuer: Digicel Limited
....Senior Unsecured Regular Bond/Debenture,
Downgraded to B3 (LGD3) from B1 (LGD3)
..Issuer: Digicel International Finance Limited
....Senior Secured Bank Credit Facility,
Downgraded to B1 (LGD1) from Ba2 (LGD1)
Assignments:
..Issuer: Digicel Group One Limited
....Senior Unsecured Regular Bond/Debenture,
Assigned Caa2 (LGD4)
..Issuer: Digicel Group Two Limited
....Senior Unsecured Regular Bond/Debenture,
Assigned Caa2 (LGD5)
Outlook Actions:
..Issuer: Digicel Group Limited
....Outlook, Changed to Stable from
Negative
..Issuer: Digicel Limited
....Outlook, Changed to Stable from
Negative
..Issuer: Digicel International Finance Limited
....Outlook, Changed to Stable from
Negative
..Issuer: Digicel Group One Limited
....Outlook, Assigned at Stable
..Issuer: Digicel Group Two Limited
....Outlook, Assigned at Stable
RATINGS RATIONALE
The downgrade of Digicel's CFR to Caa1 reflects the group's
ongoing high leverage and untenable capital structure. It also
incorporates the view that an improvement in debt profile would be dependent
not only on the completion of its asset sale program and return to positive
free cash flow, but also on the company´s ability to refinance
future maturities. The downgrade also reflects Moody's view
that there is a higher likelihood of future distressed exchanges,
even considering the extended maturities that would result from the proposed
exchange offer.
On 31 August 2018, Digicel commenced a par-for-par
offer to exchange its existing USD2.0 billion 8.250%
senior unsecured notes due 2020 and USD1.0 billion 7.125%
senior unsecured notes due 2022 at Digicel Group Limited for new up to
USD2.0 billion 8.250% senior unsecured notes due
2022 and up to USD1.0 billion 8.250% cash pay/PIK
senior unsecured notes due 2024. The new 2022 and 2024 notes will
be issued by Digicel Group One Limited and Digicel Group Two Limited,
two newly-created entities, directly and indirectly owned
by Digicel Group Limited. The exchange offer will expire on 28
September 2018.
Despite the benefits coming from the debt extension, Moody's
views this transaction as a distressed exchange because of the company's
high leverage (6.7x gross debt-to-EBITDA at 31 March
2018, as adjusted by Moody's), coupon levels on the
new notes which are substantially lower than those implied by the current
trading of the company's existing notes and subordination of the
non-tendered notes.
The assignment of a Caa2 rating to the new 2022 and 2024 notes,
one-notch below the CFR, reflects the ranking of the notes
behind the debt instruments at Digicel International Finance Limited and
Digicel Limited. If not tendered, the existing Digicel Group
Limited notes will lose covenant protection and also be structurally subordinated
to the new 2022 and 2024 notes, ranking last in the waterfall.
If completed as proposed, the exchange will allow the company more
time to execute its turnaround plan, including some assets sales.
At the closing of the transaction, we will assess any rating implications
on the instruments based on the final capital structure. We will
further evaluate liquidity, including how much, if any,
of the 2020 and 2022 notes remain outstanding. A completion of
the exchange offer and extension of the debt maturity profile would provide
Digicel with a longer runway to address its operating issues and highly-leveraged
capital structure. The company made some changes to its product
offering and pricing which it expects to drive a return to revenue and
earnings growth. Digicel has also undertaken a transformation program,
which will lead to expense savings and more effective cash management,
and pursues asset sales, which proceeds will be used to repay debt.
However, the company continues to face a number of challenges that
constrain operating improvements, which include difficult economic
and operating conditions in some of the company's large markets,
exposure of the company's operations to natural disasters and volatility
of local currencies.
Digicel's liquidity has been weakening for several quarters, with
negative free cash flow resulting in a decline in the company's
cash balance (USD158 million at 30 June 2018) and the full drawing of
its revolving credit facility, while the increase in leverage also
reduced the leeway under financial covenants. A reduction in capital
spending should help the company return to positive free cash flow by
the end of FYE March 2019 and the company will also receive, within
the coming months, USD145 million proceeds from recently announced
tower sale and leasebacks.
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, 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 $2.4 billion in FYE March 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
Moody's de Mexico S.A. de C.V
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
Mexico
JOURNALISTS: 1 888 779 5833
Client Service: 1 212 553 1653
Marianna Waltz, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 800 891 2518
Client Service: 1 212 553 1653
Releasing Office:
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