Fitch Affirms Digicel's Ratings at 'B'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the ratings of Digicel Group Limited (DGL) and its subsidiaries Digicel Limited (DL) and Digicel International Finance Limited (DIFL), collectively referred to as 'Digicel' as follows.

DGL

--Long-Term Issuer Default Rating (IDR) at 'B'; Stable Outlook;

--USD 2.0 billion 8.25% senior subordinated notes due 2020 at 'B-/RR5';

--USD 1 billion 7.125% senior unsecured notes due 2022 at

'B-/RR5'.

DL

--Long-Term IDR at 'B'; Stable Outlook;

--USD 250 million 7% senior notes due 2020 at 'B/RR4';

--USD 1.3 billion 6% senior notes due 2021 at 'B/RR4';

--USD 925 million 6.75% senior notes due 2023 at 'B/RR4';

DIFL

--Long-Term IDR at 'B'; Stable Outlook;

--Senior secured credit facility at 'B+/RR3'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Digicel's ratings reflect its well-diversified geographical operations with leading market positions, strong network quality, and brand recognition, which have and will continue to enable stable performance and cash flow generation. The ratings are tempered by the company's historically aggressive shareholder returns, high leverage, ongoing FX volatility in some of its key markets, and business concentration in countries with low ratings.

Under Fitch's approach to rating entities within a corporate group structure, the IDRs of DGL and its subsidiaries, DL and DIFL, are equal, based on a consolidated group credit profile given the strong strategic and financial linkages.

Different rating levels for each entity's debt instruments reflect varying recovery prospects given default according to seniority of the claims. Fitch believes that DIFL's secured credit facility has good recovery prospects under default, reflected in its 'RR3' Recovery Rating, as it is secured by assets of operating subsidiaries. DL's senior unsecured notes are legally and structurally subordinated to DIFL's credit facility, thus it has a lower Recovery Rating of 'RR4', which indicates average recovery prospects. DGL's senior notes are the most junior in rankings as they are subordinated to DL's senior notes, resulting in below-average recovery prospects. That has resulted in the assignment of a 'RR5' Recovery Rating.

Stable Performance Beset by FX

Digicel has generated stable operating results on a local-currency (LC) basis in the first nine months of fiscal 2016 (9MFY16), ended on March 31, 2016. Fitch expects this trend to continue over the medium term. During the period, the company's constant-currency-based service revenue posted stable growth of 4% underpinned by increasing data revenue supporting average revenue per user (ARPU), and strong growth in 'Other Markets' and non-mobile segments. Its high EBITDA margin, measured by EBITDA to total revenues, remained stable at 41.8%, which compares to 41.4% a year ago, backed by cost control efforts including subsidies despite competitive pressures. (Fitch's EBITDA calculation includes staff costs related to share options.) Subscriber base expansion has remained slow but stable, with the total subscriber base reaching 13.9 million as of December 2015 from 13.8 million a year ago.

Negatively, this growth has been largely diluted by ongoing FX volatility in some of its key markets, mainly Haiti, Papua New Guinea, and French West Indies. As a result, the reported service revenues in USD during the 9MFY16 contracted by 2% compared to a year ago. Although the negative FX movement impact in each of the company's operational geographic areas is immaterial given the close revenue-cost currency match, continued local-currency depreciation would weaken the company's ability to service debt obligation, which is mostly denominated in USD in the absence of any FX hedging.

Negative FCF to Reverse

Fitch forecasts Digicel's FCF generation to turn positive from FY17 backed by lower capex in the absence of dividend payments. Digicel's FCF has remained in negative territory in recent years mainly due to high capex for fiber network investments. The company's capex soared to USD552 million and USD649 million in FY14 and FY15, respectively, from just USD361 million in FY13, with the capital intensity ratio, measured by capex-to-sales, rising to above 20% compared to just 13% during the same period. Capex remained high at USD469 million during the 9MFY16, with the capital intensity ratio hovering at around 22%, resulting in continued negative FCF given CFFO of just USD317 million.

This trend is likely to reverse from FY17 and onwards as major investments for fiber is mostly completed in main markets. As such, Fitch forecasts Digicel's capex to decline to around USD450 million in FY17 and further down to below USD400 million in FY18, which is more in line with the previous level before major fiber deployment. In addition, Fitch believes that the company will continue to refrain from any sizable shareholder distribution in the short to medium term to shore up its cash position. This will enable the company to return to positive FCF generation and help support modest deleveraging over the medium term.

High Leverage

Digicel's leverage is high, which is incorporated in its 'B' rating level. The company's leverage has been gradually trending up driven mainly by a combination of high capex and dividends while its EBITDA growth has been relatively flat, in part due to negative FX impact. Digicel's consolidated gross debt amounted to USD6.4 billion as of Dec. 31, 2015, which unfavorably compares to USD4.9 billion at end-FY12, while EBITDAR remained at around USD1.2 billion during those years, resulting in high gross and net leverage of 5.7x and 5.5x, respectively. Positively, Fitch forecasts these ratios to gradually fall, backed by positive FCF generation from FY17.

Positive Revenue Diversification

Ongoing revenue diversification away from traditional mobile voice is positive as the revenue proportion of mobile voice fell to 56% during 9MFY16 from 64% a year ago. The contribution from mobile data should continue to steadily increase over the medium term, mitigating negative pressures on the voice ARPU, which has suffered from competitive pressures and reduced mobile termination rates in some markets. During 9MFY16, data revenues grew by 14% from a year ago on a local currency basis, accounting for 35% of mobile service revenues, driven by a steady increase in smartphone penetration to 41% from 31% a year ago.

In addition, Digicel's recent strategic focus on cable and broadband should enable further revenue diversification as it continues to connect more homes on its established networks. The company's total cable RGUs have increased by 127% during the period to 152,000 from 67,000 with the segmental revenues increasing by 200% to USD57 million from USD19 million. Despite marginal EBITDA contribution in the short to medium term, cable and broadband should be a meaningful cash generator in the long term along with business solutions and diaspora segments, of which revenues grew by 25% and 16% during the 9MFY16 compared to a year ago.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Digicel include

--Low-to-mid single-digit annual revenue growth in FY2017 and FY2018;

--EBITDA margin to fall towards 40% over the medium- to long-term;

--Positive FCF generation from FY2017 with reduced capex;

--No dividend payments over the medium term;

--Net leverage to fall to below 5.5x over the medium term.

RATING SENSITIVITIES

A negative rating action could be considered if consolidated leverage at DGL increases above 6.0x on a sustained basis, due to a combination of competitive pressures, negative FX movement, high capex, sizable acquisitions, and aggressive shareholder distributions. In addition, Digicel's inability to proactively execute refinancing of sizeable bullet maturities in the medium- to long-term could also pressure its credit quality.

Conversely, a positive rating action could be considered in the case of a sustained reduction in consolidated gross leverage to 4.0x or below, and material improvement in FCF generation with conservative debt maturities management.

LIQUIDITY

Digicel's short-term liquidity profile is adequate as the company does not face any sizable debt maturity until FY18, when USD210 million of DIFL loan is amortized, while it held readily-available-cash balance of USD291 million as of December 31, 2015. However, the company's current cash balance is materially lower than its historical levels of at least USD500 million or higher while its debt maturity materially increases to USD629 million in FY19 as the remainder of DIFL facility becomes due. Digicel's failure to return to meaningful FCF generation or successful extension/refinancing of DIFL facility could pressure the ratings over the medium term.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004972

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004972

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160523006331/en/

Fitch Ratings
Primary Analyst
Alvin Lim, CFA
Director
+1-312-368-3114
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
John Culver, CFA
Senior Director
+1-312-368-3216
or
Committee Chair
Daniel R. Kastholm, CFA
Regional Group Head - Latin America
+1-312-368-2070
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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