Digicel sales fortunes pegged to tourism

DIGICEL GROUP’S regional revenue is expected to reach US$2 billion, by 2025, according to Fitch, which cites tourism as one of the anticipated drivers of the forecasted double-digit sales growth for the telecoms.

The rating agency, however, downgraded Digicel Limited, an affiliated company, due to debt concerns.

“A rebound in tourism is expected to modestly improve the company’s Caribbean revenues, which represent 80 per cent of consolidated revenues, over the rated horizon increasing by 10 per cent to US$2 billion,” said Fitch in its report.

“Sales in the Caribbean is trending toward US$2 billion in 2025 from US$1.7 billion in 2021,” it added.

The forecast revenue, however, would still put Digicel behind its pre-pandemic sales performance a decade ago. Between 2015 and 2019, Digicel revenues dipped every year, moving from US$2.8 billion to US$2.3 billion in the year prior to the onset of the pandemic. The company’s revenues have been under pressure due to local currency depreciation and declining mobile voice sales, which have outweighed gains elsewhere, Fitch said.

Revenue also fell over the first six months of 2020 to US$1.13 billion from US$1.14 billion in the year prior.

Last October, Digicel Group announced the sale of all of Digicel Pacific to Telstra Communications for US$1.85 billion, including performance earnouts. Fitch sees Digicel netting US$1.4 billion in cash from the transaction when it closes later this year.

The downgrade of Digicel Limited shouldn’t affect Caribbean customers, as Fitch sees the telecoms continuing to invest roughly US$270 million on capital expenditure going forward. It will, however, send a signal to bondholders and prospective investors on how the rating agency views the company’s balance sheet.

“Digicel’s decision to restructure debt twice remains a constraint on the ratings. The group has a concentrated ownership and control structure along with a complex group structure that weakens both Digicel’s corporate governance and the group’s consolidated credit profile,” Fitch said.

Fitch downgraded Digicel Limited from ‘B-’ to‘CCC+’, while maintaining unchanged ratings for Digicel Group Holdings Limited, DGHL, and Digicel International Finance Limited, DIFL.

Fitch has 11 grading tiers starting at ‘AAA’, which reflects the highest quality, down to ‘D’ for entities in bankruptcy, receivership or simply winding up.

Digicel Limited’s current rating means a “very low margin for safety”for debtholders and that “default is a real possibility”.

The downgrade of Digicel Limited “reflects the increased refinancing risk of its US$925 million unsecured notes due in March 2023”, the rating agency said.

Digicel’s total debt stands at US$5.7 billion of which US$2.9 billion resides with DIFL, US$925 million with Digicel Limited level and US$1.7 billion with DGHL.

Of the expected US$1.4 billion inflow to come from the sale of its operations in the Pacific islands, Digicel Group is expected to utilise US$1.048 billion to repay senior secured PIK notes payable through DGHL and due in 2024.

It leaves insufficient funds to cover the upcoming Digicel Limited payment, the rating agency noted.

“Even if the remaining US$352 million will be used to partially repay its Digicel Limited’s US$925 million senior unsecured note due in March 2023, the ability of Digicel Limited to successfully refinance the balance of this debt outside of a coercive exchange remains uncertain due to deteriorating macroeconomic conditions, rising interest rates and a decrease in risk appetite,” Fitch said.

Digicel operates in 32 markets across the Caribbean and the Pacific.