Digicel dividend practices criticised as bond exchange looms

By Jamaica Gleaner

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Digicel founder and chairman Denis O’Brien.

(JAMAICA GLEANER) – Digicel Group Limited, whose footprint began in Jamaica, continues to push for acceptance of a debt exchange on US$3 billion of its bonds even as some bondholders threaten legal action, and a default rating looms from a top credit rating agency.

The telecoms owned by Irish billionaire Denis O’Brien announced last week that it would extend the offer from mid-September to month end amid a revolt among bondholders. The offer would extend the life of two of its bonds by two years on adjusted terms. The company said previously, it is meant to reduce its debt ratio by at least one turn.

Inside Jamaica, brokers see limited options for holders of the bond.

“The acceptance by bondholders is a better option than default or reduced payment on the dollar for each unit of bond principal held,” said President of MoneyMasters Limited Claudette Crooks.

The bonds both offer coupons in the single-digit range, but both are trading below par, which has pushed the yield to approximately 25 per cent on hard-currency notes.

Digicel Group’s leverage towers at 6.7 times gross debt-to-EBITDA. The refinancing offer is expected to at least cut that by one turn to 5.7 times.

Crooks said that Digicel could have opted to finance most or some of its debt in the currency in which it earns revenue rather than hard currency. This would have avoided foreign exchange fluctuations.

She also dinged the company for using its cash over the years to pay dividends to shareholders, instead of deploying it to pay down debt.

“The practice of the principals taking opportunistic dividends over the years with high holdings of debt would be concerning. One would expect the covenants under the restructured debt to address this fully,” stated Crooks on Tuesday.

She also indicated that the brand’s strong appeal and consumer loyalty gives it options to raise funds on the equity market.

The CEO of another brokerage, who requested anonymity to comment, said Digicel needs to demonstrate that it can grow earnings, or EBITDA, from its current US$1 billion annually. It would give Digicel more room to pay debt, the person said.

“I haven’t looked closely at the Digicel bond, since most of our clients sold long ago,” he said. The decision to stay should be based on whether you believe the company can increase its EBITDA.”

The broker said Digicel should explore entering into new markets or services with low barriers to entry. He, too, noted that funds distributed as dividends ought to be used for market forays.

Digicel offered no comment, when contacted this week, on its downgrade or the prospect of legal action by a group of overseas bondholders set to reject the refinancing offer.

Under the restructuring offer now extended to September 28, Digicel Group’s subsidiaries have commenced the exchange of US$2 billion of senior notes at 8.25 per cent for US$2 billion of newly issued notes at 8.25 per cent. The notes would mature in 2022 instead of 2020.

Another US$1 billion of notes priced at 7.125 per cent and due 2022 would be exchanged for US$1 billion of newly issued 8.25 per cent senior cash Pay/PIK notes.

Last week, some independent bondholders reportedly hired the law firm Akin Gump to seek redress from the telecoms.

On August 31, Moody’s Investors Service downgraded Digicel Group’s corporate family rating to Caa1 from B2, as well as its existing debt instruments, saying its rating action “reflects the company’s untenable capital structure”.

“If completed as proposed,” Moody’s warned that it would consider the offer as a distressed exchange, which is a default under Moody’s definition. It downgraded Digicel’s probability of default rating to Caa3-PD.

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