Hold-out Digicel bondholders to lose US$84m
Bondholders will likely lose the principal on their investment, worth US$84 million ($12 billion), arising from the September maturation of two Digicel bonds that were refinanced.
Digicel said the bondholders were previously offered opportunities to exit the bonds under the debt restructuring executed by the company in June, but did not participate in the swap.
Some investors, however, did not take up the new bonds, because by doing so they would have been agreeing to lose nearly 70 cents on the dollar on their principal investment.
But now the hold-outs will lose all of their principal if Digicel maintains its current stance that it will not be making payments against the old bonds.
The decision is roiling both bondholders and brokers.
“They should honour this payment,” declared a bond manager at a local brokerage house who requested anonymity to speak freely about the bonds in order to avoid a stand-off between them and Digicel.
Up to the final day in September, the 8.25 bond was trading at a yield of 375,000 per cent, according to the bond manager. Bond yields move inversely to price, that is, as the yield rises, the price falls and vice versa. The instrument referenced by the trader was issued at US$100 some eight years ago. It traded at US$60 up to April of this year, then dipped to the US$6 range in June, and further to US$5 in September.
“Bondholders have the right to accept or not to accept Digicel’s refinancing terms. So, they should honour this repayment. This should not be allowed to happen,” the bond manager said.
One bondholder, who refused to accept the refinancing terms in principle, told the Financial Gleaner that they filed a complaint with the Financial Services Commission, FSC, the local regulator of the Jamaican securities market. She said that up to Tuesday the FSC had not responded to her complaint.
However, Digicel bonds were not issued in this jurisdiction, suggesting that the FSC is unlikely to have any sway over decisions made by the telecoms about the debt.
The Jamaica Securities Dealers Association, JSDA, plans to issue a statement on the issue later this week, after consulting with member dealers, according to president Steven Gooden.
Digicel Group’s position is that its bonds were sold under specified conditions and issued under the jurisdiction of the United States, and were not intended for unsophisticated retail investors.
“Digicel has always sold its bonds to institutional or qualifying investors in the US, strictly in accordance with the terms of its offering memoranda, and did not directly sell any bonds to investors in the Caribbean who did not meet this strict criteria,” Digicel Group head of communication Antonia Graham told the Financial Gleaner.
“The bonds were never intended for, nor should they have found their way into the hands of, retail investors; only sophisticated institutional investors and other similarly qualified investors should have bought these bonds,” she said.
Digicel refinanced four bonds this year. The telecom extended the life of the bonds for two years at lower coupon rates, reducing the company’s debt load by US$1.6 billion to about US5.4 billion in the process.
Most bondholders accepted the refinancing terms, pushing back the maturity of the bonds, which will now be redeemed mostly in 2024 and one in 2025. The 8.25 note, for example, got over 97 per cent acceptance. As context, the Digicel 8.25 note and 7.0 note were part of a series of bonds that the company refinanced in 2019 and then again in 2020.
“As a result, holders of US$63 million of 8.25 bonds that matured on 30 September 2020 and US$21 million of 7.125 2022 bonds who did not accept the 2019 exchange offer, will lose substantially all of their investment,” Graham said. Together, the outstanding bonds when tallied would value US$84 million.
Following that restructuring, earlier this year, the vehicle used by Digicel to issue the old bonds was liquidated.
“These liquidations follow a winding-up petition to the Bermudan courts, which marked the final administrative step in concluding the comprehensive debt reduction process,” Graham said.
Separately, there are two more bonds, DGL2 2022 and DGL2 2024, that remain open for subscription under the refinancing programme initiated this year.
The timeline was extended due to what Digicel said was a realisation that some retail investors might need more time to decide. The telecoms said US$35 million of the notes remain open for take up.
Digicel will issue the new notes at a value of US$348 for every US$1,000 of the old 2022 notes; and US$227 for every $1,000 of the old 2024 notes.
These are equivalent terms to other investors holding the same DGL2 bonds, which initially got 87 per cent take up, the company said.
The deadline for acceptance of the remaining notes has been extended to October 31.
“This facility was made possible after Digicel took the unprecedented step of placing these bonds in a trust, after it became aware that some of its bonds had been acquired indirectly by retail investors who may not have been aware of or understood the DGL2 tender offer,” said Graham.
“Since becoming aware of this issue, Digicel has also reached out repeatedly to financial institutions or intermediaries who may have sold these bonds to encourage acceptance of the exchange offer by their clients,” she said.
The Digicel 8.25 bond raised US$2 billion at placement in year 2012. It was refinanced in January 2019 and swapped for US$1 billion of DGL1 2022 and US$937 million of DGL2 2024 bonds, said Digicel.
The bondholders who did not participate in last year’s bond swap “ultimately saw their holdings subordinated to the US$7 billion of more senior debt in that 2019 exchange offer, which has since been restructured”, Graham said.