For bondholders in Irish billionaire Denis O’Brien’s mobile empire, it has been a roller coaster few months. Now, they’re looking for reassurance that the rough ride is almost over.
Within the next month, Digicel Group executives will brief investors worldwide, introducing them to its new management and beginning to lay the ground for an eventual $2 billion (€1.6 billion) refinancing of a bond maturing in 2020, according to a person familiar with the matter. The so-called "non-deal roadshow" comes after the 2020 yield rose as high as 15.4 per cent from 8.5 per cent – making it the worst emerging markets performer this year.
"What needs to happen is for the company to come out now with something positive," said Till Moewes, an analyst at Schroder Investment Management, which holds a share of the debt. "They need to produce some new positive news to stop this negative chain reaction."
Digicel has a history of refinancing early, and some investors might have hoped the company would move to redeem the 2020 bond this year. While no final decision has been taken, that probably won’t happen any time soon should yields remain close to their current level, even after a recent dip, according to the person familiar, who asked not to be identified as deliberations are continuing.
O’Brien built his mobile empire, which stretches from Haiti to Papua New Guinea, on high-risk, high-yield debt. Since 2001, Digicel has accumulated about $6.5 billion of borrowings, mostly to build out networks across 31 regions. More than two years after the company shelved a planned share sale in New York that was in part designed to pay down debt, and with recent earnings disappointing investors, bondholders want a positive catalyst. Digicel faces a $1.3 billion maturity in 2021, as well as the 2020 payment.
“We expect Digicel to address that with anticipation,” said Marie Fischer-Sabatie, an analyst at Moody’s Investors Service. “If the company doesn’t make material progress in 2018 and does not start to address the issue by the middle of this year, then we could start to see some pressure on ratings.”
Widening spread
The extra yield, or spread, over Treasuries investors demand on Digicel’s 2020 bonds has widened by 358 basis points, or 3.58 percentage points this year, while emerging-market bond spreads widened 13 basis points. The drop in its bonds pushed the spread above 1,000 basis points, or 10 percentage points.
Meanwhile, momentum at Digicel has stalled. Underlying revenue in its fiscal third-quarter dropped about 3 per cent from the year-earlier period to about $580 million, according to a source. Adjusted earnings before interest, taxes, depreciation and amortization were about $246 million, down around 3 percent.
A number of issues were at play, according to the source. Among these were delays in signing some corporate contracts, new incentives to drive data use which hurt short-term earnings and persistent weakness in Papua New Guinea’s economy, a key market for the company.
Digicel, which declined to comment for this article, faces no immediate pressure, as its next big bond maturity is over two years away and it has pushed out its timetable to reduce borrowings, which amount to about 6.5 times earnings.
Progress is needed, said Moody’s Fischer-Sabatie, who described Digicel’s debt level as “high” for its B2 rating. O’Brien laid out plans last year to dismiss 1,500 workers, and appointed Alexander Matuschka as chief executive.
“We still anticipate that Digicel will see some growth in Ebitda over the next 12 to 18 months, in particular because the company will see the benefits of its transformation programme,” said Fischer-Sabatie. “So we expect a gradual reduction in leverage.” – Bloomberg
