Sun | Aug 18, 2019

JMMB tells clients to sell Digicel bonds

Published:Wednesday | May 8, 2019 | 12:16 AMSteven Jackson/Senior Business Reporter
Digicel headquarters on the Kingston waterfront.
Digicel headquarters on the Kingston waterfront.

JMMB Group, one of the largest financial service providers, advised its clients to consider cutting their losses and sell their Digicel bonds, which is now trading at around 33 cents on the dollar.

It’s a sign that investors are losing patience with the telecom’s efforts to improve its finances.

Digicel Group responded that it was implementing measures aimed at driving revenue, which will make servicing the bond easier.

“Following a period of significant capital investment and operational progress, Digicel has well invested mobile and fixed networks. Reduced capex spend in the future, together with a return to revenue growth, will enable Digicel to deleverage over the coming years,” said Digicel Group head of communication, Antonia Graham, in response to Financial Gleaner queries.

Digicel continues meeting its interest payment obligations on the bond. The telecom, however, recorded a US$22.8-million net loss for its December quarter, which reversed the US$7.2 million net profit a year earlier. Heavy taxes and a US$13.5-million impairment contributed to the losses. Revenues were also down 3.5 per cent to US$578 million due to foreign exchange movements in key markets.

Similar to its peers across the globe, Digicel said monetising the shift from voice to data continues to pose “significant challenges” for the telecom.

“We believe that we can continue to improve and monetise data, to drive stronger revenue performance. In addition, we are seeing revenue growth from our cable and business solutions businesses,” Digicel said.

JMMB said Digicel’s results have not improved in line with expectations. This makes servicing of these bonds continuously challenging, according to JMMB analysis seen by the Financial Gleaner.

“As such, we have updated our recommendation to sell and advise clients to exit their holdings in Digicel as we believe the bonds will continue to trade well below par in the medium term with significant risk of further price depreciation,” the brokerage said.

DISPOSING OF BONDS

Earlier this year, JMMB advised its clients to hold the bonds. The Financial Gleaner sought clarification from the brokerage on the pros and cons of clients disposing of the bonds, as selling would translate a paper loss into a realised loss. On Tuesday, JMMB indicated that it would respond.

Investors which sell $1 million worth of bonds would receive roughly $330,000 upon sale. Without selling, however, the losses are only on paper, while the value of the holdings should return towards $1 million as the bond nears maturity, unless Digicel defaults.

JMMB believes that Digicel will be hard-pressed to meet its obligations, as current yields make refinancing an unattractive option. Additionally, the sharp fall in cash and limited access to capital markets will restrain the company’s capital expenditures, which is by nature very high for the telecommunications industry, added JMMB in its analysis.

In January, Digicel extended the timeline for the payout of bonds due by 2020 and 2022 to 2022 and 2024.

“These notes are trading well below par, indicating that investors are not completely sold on Digicel’s future, even after a successful debt exchange which bought the company an extra two years on almost $3 billion in debt,” said JMMB.

Rating agency Moody’s assigned a limited default status to the bonds following the extension, although it revised the rating to Caa1, up from Caa3.

Despite the benefits from the two-year debt extension, Moody’s labelled the transaction as ‘distressed’, mainly because of Digicel’s “untenable capital structure”, with high leverage of around 6.7 times gross debt to EBITDA, or earnings before interest, tax, depreciation and amortisation.

In March, Moody’s assigned a B1 rating to two Digicel subsidiaries, which proposed US$550 million of senior secured notes due 2024, but maintained Caa1 as its corporate family rating for Digicel Group Limited. The rating agency also maintained a stable outlook for the group.

steven.jackson@gleanerjm.com