Digicel needs to boost cash to pay down debt, says Fitch

(Jamaica Gleaner) - A top ratings agency is saying that Digicel Group needs to improve its free cash flow by next March in order to offset debt maturities.

Digicel needs material recovery in free cash flow generation to avoid any potential refinancing risk of escalating debt maturities, said US-based Fitch, which maintained a B/Stable rating for the telecom.

“Digicel’s successful extension of upcoming loan maturities from March 2018 will remain a key credit focus in the near term given its recent financial profile deterioration,” said Alvin Lim, director at Fitch. “Weaker-thanexpected free cash flow recovery in FY 2018 and FY 2019, which hinders the company to achieve a comfortable debt maturity schedule, will immediately pressure the ratings,” he said.

Digicel, a privately held company founded and controlled by Denis O’Brien, said on Tuesday it would not comment on Fitch’s assessment.

Digicel’s operations span more than 30 markets in the Caribbean, Central America and Pacific islands.

Some of the areas that Fitch views as key drivers for the growth of free cash flow in the short to medium term include stable foreign exchange rates, cable operation turnaround, and meaningful cost savings under Project Swan.

The cost-cutting plan was reported on in December. Those reports put Digicel’s debt load at more than six times its earnings.

Requirements

Fitch estimates that Digicel requires at least US$1.1 billion of earnings before interest tax, depreciation and amortisation (EBITDA) to achieve breakeven free cash flow, backed by reduced capex of US$400 million in FY 2018 and FY 2019.

Fitch expects the company to exceed this EBITDA threshold in FY 2018, but said continued investment in Digicel Holdings Central America Limited and licence fees may limit deleveraging. More sizeable free cash flow generation is expected in FY 2019.

Quarterly revenue for the telecom fell seven per cent to US$638 million for the July-September 2016 period, while its EBITDA, declined 14 per cent to US$253 million, said UK based Barclays in its analysis of Digicel Group’s recent developments and earnings.

The dip in revenue and earnings in the quarter was due in part to currency fluctuations in key markets.