Tue | Mar 20, 2018

Digicel revenues vulnerable after Fed rate hike, says Fitch

Published:Wednesday | June 21, 2017 | 12:00 AM
Digicel's headquarters in downtown Kingston.

The revenues of telecoms Digicel Group could dip in real terms due to higher currency depreciation arising from hikes in the United States Federal Reserve benchmark rates, according to Fitch ratings agency.

Fitch's concerns relate to the domino effect of higher Fed rates on currency depreciation and its impact on revenues. Additionally, the rate hike could raise the interest cost on Digicel's refinanced loans.

Consequently, the ratings agency is suggesting that Digicel "materially" improve its earnings before interest tax depreciation amortisation, or EBITDA,to cope with these risks in the short to medium term.

The Fed last raised its benchmark rate by a quarter point last week, putting it within a range of one to 1.25 per cent.

Fitch affirmed its 'B' rating for Digicel long-term debt, saying the refinancing of debt held by Digicel last month improved its financial flexibility, although repayments down the line is concerning.

"Digicel's medium-term refinancing risk for its senior notes from financial year 2021 remains a key credit concern," the ratings agency said.

However, it views the recent cost and headcount-reduction initiatives under Project Swan and investments in cable as ways to achieve meaningful free cash flow generation over the next two years.

Fitch assumes that Digicel will have low single-digit annual revenue growth in financial year ending 2018 and 2019. It assumes gradual EBITDA margin improvement from the 2018 financial year backed by profitable cable operations and transformation projects. It assumes positive free cash flow in 2018 and 2019 with an average annual capital expenditure of US$420 million. It assumes no dividend payments over the medium term and adjusted net leverage to fall to below 5.5 times by 2019 from over 6.0 times.

Fitch indicated that "Digicel's financial flexibility" was improved during May 2017, following Digicel International Finance Limited's refinancing of its existing credit facilities. Consequently, the telecoms will not face any large bond maturities until 2021 when US$2 billion becomes due.

"Digicel's ratings reflect the company's well-diversified geographical operations with leading market positions, strong network quality, and brand recognition, which support relatively stable performance on a local-currency basis. This is tempered by the company's high leverage, adverse foreign exchange volatility in the absence of effective hedging, and its recent negative free cash flow generation and low cash balance," the ratings agency said.

Digicel, founded by Denis O'Brien, operates in more than 30 markets in the Caribbean, Central America and the Pacific Islands.

Fitch indicated that over nine months ending December 2016, Digicel generated relatively stable operating results on a local-currency basis, but said revenue growth was largely diluted by ongoing foreign exchange volatility, leading to a six per cent revenue contraction in US dollar terms. EBITDA deteriorated by 12 per cent in the same period, "although it remained relatively unchanged under the constant currency terms," stated Fitch.

Digicel's cable segment represented seven per cent of total revenue, while business solutions contributed eight per cent during the December third quarter. Fitch added that the cable segment reached profitable EBITDA for the first time during the third quarter, and expects the segment to contribute to about US$40 million EBITDA improvement in financial year ending March 2018.