Moody’s goes ‘negative’ on Digicel, despite cell tower deal
Ratings agency Moody's Investors Service changed its long-term outlook on regional telecoms Digicel Group to negative, arguing that the planned sale of cell towers to reduce debt needs more disclosure.
It is rare for Moody's to issue such a change of outlook for Digicel. It signals a likely downgrade of the company's credit rating were its debt levels to remain high.
Digicel has a mountain of debt to repay in 2020 and 2021 - US$3.3 billion - and that's the focus of Moody's concerns.
"The change in outlook to negative reflects the company's ongoing high leverage and the reduced runway available to the company to simultaneously improve its fundamental credit profile and address its large looming debt maturities with anticipation," the rating agency said in its new assessment of the telecoms.
However, Digicel Group chose to ignore the changed outlook, focusing instead on its ratings.
Asked for comment, the telecoms said: "Moody's has maintained our credit rating and the business is committed to reducing leverage by one turn over the fiscal year through a combination of organic and inorganic means."
Digicel plans to sell 450 of its Caribbean cell towers in a bid to reduce its leverage, a deal the telecoms said should be finalised in the second quarter of its financial year, which ends September 2018.
The deal, which involves the sale and leaseback of the towers, could potentially reduce Digicel's debt-to-equity ratio from 6.7 times to 5.7 times.
Last year, Digicel reportedly sold 202 communication towers in El Salvador to US-based Phoenix Tower International in a multimillion-dollar deal.
In its assessment, Moody's changed to negative from stable the outlook on the ratings of Digicel Group Limited and Digicel Limited and assigned a negative outlook to Digicel International Finance Limited.
The rating remains stable or "affirmed" with a B2 rating for Digicel Group Limited, as well as the B1 rating on the unsecured notes of Digicel Limited and the Ba2 rating on the secured bank credit facilities of Digicel International Finance Limited.
"Digicel is considering inorganic transactions, such as asset sales, which could accelerate the reduction in net debt, but the timing and amount of related proceeds remain uncertain," said Moody's.
"The decline in leverage will only be gradual. Digicel faces large debt maturities, starting in 2020, with the first bond to mature a US$2-billion unsecured bond at Digicel Group, followed by a US$1.3-billion bond maturity at Digicel Limited in April 2021. The negative outlook also considers that the company's currently weak financial profile is constraining the group's refinancing options."
Moody's acknowledges that while Digicel holds the number one market position in 22 of its 31 markets, its debt levels and negative free cash flow are concerning.
"Digicel is also present in emerging markets with a history of instability and exposure to adverse weather events, and is exposed to the risk of currency depreciation against the US dollar," said the ratings agency.
Moody's anticipates that free cash flow will improve and at least reach break-even in the 2019 financial year end, due to a reduction in capital spending.
"Digicel's ratings could be downgraded if the company does not reduce debt to EBITDA below 6.0 times within the next 12 months or if the company does not refinance its large debt maturities with anticipation, at least 12-18 months before maturity. A weakening in the company's liquidity profile would also trigger a downgrade," added Moody's.
On the flip side, Moody's would upgrade Digicel's ratings if leverage were on track to fall below 4.0 times debt to EBITDA.
Digicel, founded by Irish billionaire Denis O'Brien, operates in over 30 markets spanning the Caribbean, Central America and the Pacific Islands. The group reported a US$99-million net loss on revenues of US$2.4 billion for FY 2018. The previous year, it made a net loss of US$6 million.
The group indicated that its full-year performance was in line with expectations, saying revenues were down year-on-year due to a number of factors affecting different markets, including declining voice calls, hurricanes, and tariff changes.
Jamaica accounted for roughly 16 per cent of revenues and showed improved results particularly in the final quarter. Subscribers grew by 68,000 quarter-over-quarter at March 2018, while fourth-quarter revenue amounted to US$92 million.