Junk bond titans O’Brien and Coulson take different path to payback

Businessmen Denis O'Brien and Paul Coulson, who have built empires on the back of €14 billion in mainly high-risk, high-cost "junk-bond" debt, opted this week to go down very different paths to prove to their lenders that they're good for their money.

In an effort to reboot flagging earnings and ease the debt burden on his Digicel mobile group, O'Brien pushed the button Wednesday on a plan to cut 1,500 jobs, or a quarter of its workforce. A day later, Ardagh Group executive chairman Paul Coulson confirmed he was pressing ahead with a plan to raise an initial $300 million (€285 million) through an initial public offering (IPO) and New York Stock Exchange listing by the end of March.

"Both companies are focused very much on deleveraging now," said David Holohan, chief investment officer at Merrion Capital in Dublin,

Ardagh, which traces its roots to the former Irish Glass Bottle Company in which Coulson bought an initial stake in 1998, has since been transformed into one of the world's largest glass and metal container manufacturers, whose customers include Coca-Cola, Heineken and Nestlé. Its growth has come on the back of a series of acquisitions, based on borrowings.

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Stock buybacks

Over the past six years, Ardagh has also returned €520 million to shareholders though stock buybacks and special dividends – largely funded by the most risky type of debt of all: payment-in-kind notes, where interest payments can be rolled up. Coulson owns about 36 per cent of the company.

Ardagh had €6.4 billion of high-yielding loans at the end of 2015, weeks after Coulson cancelled a planned IPO of its aluminium cans division, the proceeds of which had been earmarked to cut its borrowings. Five months later, he confounded observers by agreeing his biggest deal yet the $3.4 billion (€3.2 billion) purchase of a beverage cans business from US packaging group Ball and UK rival Rexam.

The deal would bring the group’s total borrowings to €8.2 billion. But, crucially, because of the additional profits the deal brought – helped by Ardagh’s ability to grind out savings as it integrates acquisitions – net debt rose to just 5.4 times earnings before interest, tax, depreciation and amortisation (ebitda) from 5.2 per cent a year earlier.

More importantly, the amount of cash Ardagh throws off after investments – what’s known as free cash flow – surged 63 per cent last year to €519 million. Free cash flow is key to a company’s ability to pay down debt.

For its part, Digicel, set up in Jamaica in 2001 and currently operating across 31 Caribbean and Asia-Pacific markets, has spent $2.3 billion in the past five years upgrading its mobile networks and rolling out fibre to homes as it pushes into TV and broadband. During this period, O’Brien pulled $1.1 billion in special dividends out of the company, which has been left with a $6 billion-plus debt mountain.

Volatile market

O’Brien abandoned plans to raise as much as $2 billion in an IPO in September 2015 as would-be investors were demanding too much of the company in a volatile market.

“I think Digicel probably regrets now not having pushed ahead with its initial public offering, which would have given it access to equity markets, allowing more options and flexibility as it seeks to cut its debt burden,” said Holohan.

The group’s debt equates to about six times ebitda at a time when earnings are being hit by currency weakness across some of its main markets. The Jamaican dollar has fallen by 11 per cent in the past two years against the US dollar, the currency in which Digicel reports earnings and issues most of its debt. The Haitian gourde has depreciated at almost four times that pace.

Digicel has indicated to analysts that its free cash flow will be as much as $135 million in the red for its financial year to March – although it expects to be generating proper cash next year. The group has set itself an ambitious target of cutting its debt from six times ebitda to 4.5 times by March 2018.

Meanwhile, it must continue to invest just to stand still in the fast-evolving industry, where online services such as Skype and WhatsApp are eating phone companies’ lunches. A multi-year network upgrade deal with Chinese company ZTE, announced this week as part of its transformation plan, should help contain costs. It is understood Digicel is also planning to make other service providers charge in local currencies across its markets – making them share the risk of currency fluctuations.

Digicel’s bond investors hope the plan will pay off and possibly pave the way for a successful IPO.

"Currency pressures have started to ease and the transformation plan alongside the company's successful [recent] entry into broadband and TV give confidence for future earnings improvement," said Stephen Lyons, a debt analyst at Davy.

“The scale of the staff reduction announcement is a signal of real intent by Digicel to drive change. Digicel is no longer the young upstart but is now a well-established leading player across all its geographies. Its rapid growth understandably justifies organisational change as the company evolves.”