Crunch time for Denis O’Brien as Digicel bond clouds loom

When Denis O’Brien sold out of Ireland’s biggest newspaper group in 2019, the billionaire drew a line under an investment that had cost him more than €450 million.

Now the country's richest man faces crunch time again as Digicel, the Jamaica-based mobile phone company he launched in 2001, struggles to refinance the company in the face of its $6.7 billion (€6 billion) debt.

The company was once a cash cow for Mr O’Brien. Between 2012 and 2014 he received dividends totalling $1.1 billion from Digicel, which operates in 31 markets, mostly in the Caribbean and also in Central America and the Pacific islands.

“It’s been a good piggy bank,” said one senior Dublin financier who has tracked Mr O’Brien’s business affairs for years. “But those days are now well and truly over.”

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Flotation

An abandoned 2015 Wall Street flotation, which hit plans to trim long-term debt by up to $1.3 billion, and a succession of testing bond maturities have piled pressure on the business.

For Mr O'Brien, a veteran of many scrapes who made his first fortune winning Ireland's second mobile phone licence in the 1990s and then selling to British Telecom, the coming months will be critical.

With a $1.3 billion repayment looming in April 2021 and a series of maturities reaching $3 billion in the following 18 months, he must make tough decisions to stabilise Digicel’s finances.

He has been here before. After lengthy talks with Digicel bondholders in 2018, the maturities of two bonds worth a combined $3 billion due in 2020 and 2022 were extended by two years, with no haircut on the principal.

For bondholders including Ashmore, Eaton Vance and Goldman Sachs, the stakes are also high. Digicel bonds were trading at 15 to 16 cents in the dollar in December, amid anxiety about the outlook for the business.

Credit rating agency Fitch said recently that Digicel faced "imminent refinancing risk", and would have to restructure debt at multiple levels over the next 12 to 18 months because of an unsustainable capital structure.

Similar concerns have been raised by Moody’s, which warned in July of an increasing risk that Digicel would make another distressed exchange or debt restructuring.

The company’s operating performance has been weighed down for years by a difficult transition to mobile data services, as it struggled to replace the voice service revenues that were once its bedrock.

Currency depreciation in key Caribbean markets has compounded the problem, with most of the company’s debt denominated in dollars. Given the high interest burden, free cash flow is negative.

But Digicel believes it is making progress, with data revenue exceeding voice for the first time in the three months to June, the first quarter of its financial year, and rising in the second quarter by 15 per cent. Revenues from business and home entertainment services are also improving, but comprise just 20 per cent of the total.

Second-quarter earnings before interest, tax, depreciation and amortisation dropped 1 per cent against a year earlier to $250 million. Underlying revenues rose 4 per cent to $580 million but a $26 million currency hit took reported revenues down 1 per cent to $554 million. The currency impact was driven primarily by the gourde’s decline in Haiti, a big Digicel market roiled by unrest and economic stagnation.

Revenues

Sul Ahmad, associate director with Fitch in Chicago, said that while revenues should start to stabilise within 12 to 18 months, a recovery was unlikely to be swift.

“We don’t see there being enough of an operational turnround in the near to medium term for the company to organically deal with its debt maturities,” he said.

The situation is all the more urgent because indebted companies such as Digicel tend to refinance big debt obligations about 18 months in advance. With only 16 months remaining before the 2021 maturity, the company is known to be exploring its options.

Digicel declined to comment.

Nicole Green, analyst with Xtract, a debt covenant research service in New York, said one possible route for the company would be a debt exchange with 2021 bondholders to extend repayments, similar to the manoeuvre that prolonged the 2020 and 2022 notes.

But she added that such a move would raise many questions: “Can the company offer these holders something attractive enough to have them agree to this consensual exchange? If this is just a maturity extension is this going to be something attractive for the holders given the outlook for the company?”

To maximise the benefit from such an exchange, Digicel might need to approach the holders of a $925 million note due in March 2023, which Ms Green said had the same status in the company’s capital structure. “If the 2023 holders aren’t approached, how much maturity relief would they be able to get if they approach only the 2021 holders?”

The stance of bondholders, who pressed Mr O’Brien hard in 2018 by spurning his original offer to restructure debt and ultimately forced him to sweeten the terms, will be critical.

Equity

One key question is whether investors will push him to inject fresh equity into the company, something he did not do during the last restructuring. Still, the Dublin financier said Mr O’Brien would be likely to play “hardball” with investors whenever the crunch comes.

A person close to one Digicel bondholder argued against a huge bond restructuring, saying the company should be allowed to dig itself out of trouble. “They need more time to return the business to growth,” the person said. “They should extend near-term maturities to buy time and go from there.”

Still, Mr Ahmad believes there is no silver bullet that can banish Digicel’s debt woes.

“I think that the company does have some levers to pull,” he said.

“But the magnitude of the challenge - given where they are operationally - is very, very significant vis-à-vis the debt pile.” – Copyright The Financial Times Limited 2020