MONTERREY, Mexico--()--Digicel Limited's (DL) proposed US$700 million senior notes due 2021. Proceeds from the issuance are expected to be used to refinance DL's US$510 million senior notes due 2014 and for general corporate uses. 'RR4' rated securities have average recovery prospects given default and characteristics consistent with securities historically recovering 31% - 50% of current principal and related interest. The Issuer Default Rating (IDR) of DL and its parent, Digicel Group Limited (DGL), is 'B'. The Rating Outlook is Stable.
KEY RATING DRIVERS
Digicel's ratings reflect solid operating performance and cash from operations (CFO) generation, diversified revenue, and expectation for stable credit metrics. In addition, the ratings are supported by its position as the leading provider of wireless services in most of its markets and strong brand recognition. Digicel's credit quality is tempered by continued high leverage and the exposure of its operations to low rated countries.
Under Fitch's approach to rating entities within a corporate group structure, the IDRs of DGL, DL and Digicel International Finance Limited (DIFL) are the same and viewed on a consolidated basis as they have a weaker parent and the degree of linkage between parent and subsidiaries is considered strong. For issue ratings, Fitch rates debt at DIFL one notch higher than its parent DL reflecting its above average recovery prospects. DL's ratings reflect the increased burden the DGL subordinated notes place on the operating assets and the loss of financial flexibility. The ratings of DGL incorporate their subordination to debt at DIFL and DL, as well as the subordinated notes' below-average recovery prospects in the event of default.
STABLE OPERATING TRENDS
Fitch expects value added services (VAS) as a percentage of revenue to continue increasing its share in revenues. Positive trends in VAS have supported revenues and EBITDA over the past few quarters, offsetting pressures from traditional voice services in some markets due to reductions in MTR, tax increases and strong competition. In addition Papua New Guinea (PNG) growth continues to support operating results. For the quarter ended Dec. 31, 2012 VAS accounted for 23% of service revenues, of which 16% is non-SMS revenue. Both SMS and other data services have posted positive trends.
DGL has diversified its cash flow generation and asset base leading to lower business risk over the past several years. EBITDA growth from PNG should further diversify cash flow generation from Jamaica and Haiti in the coming years as cash flow coming from these two countries remains material at an estimated 40%. Positively, Digicel Pacific Limited (DPL), a subsidiary of DGL, has continued growing and is now generating positive free cash flow. DPL's growth is underpinned by PNG which is now able to pay dividends to DGL after dividend blockers have been removed. For the 12 months ended Dec. 31, 2012 DPL contributed approximately 24% of DGL's EBITDA. The most important contributors to DGL's EBITDA are Jamaica, Haiti, PNG, Trinidad & Tobago and French West Indies (FWI).
LOWER CAPEX SUPPORTING FREE CASH FLOW (FCF)
Fitch expects positive FCF in the coming years, in the absence of special dividends, as funds from operations (FFO) modestly grow and capex declines from its peak in FY2012. Capex to revenue ratio is expected to trend towards 10% in the next few years. Lower capital expenditures should have a positive effect on FCF in the medium term amid a stable dividend policy of US$40 million per year. DGL paid a US$300 million special dividend during the first quarter of FY2013. Digicel expects that for the near future the company will not raise its 42.52% (44.97% including warrants) stake in Digicel Holdings Central America Limited (DHCAL), which owns the operation in Panama.
Leverage at DGL remains high but is expected to gradually decline in the medium term, as EBITDA grows and indebtedness remains relatively stable. As of Dec. 31, 2012 and last twelve months EBITDA, total debt to EBITDA was 4.4 times (x) and net debt to last twelve months EBITDA was 4.1x. At DL, total debt to EBITDA was 2.8x for this same period. Total DGL's debt of Dec. 31, 2012 was approximately US$4.9 billion and cash balances amounted to US$353 million. Total consolidated debt is allocated as follows: US$2,275 million at DGL, US$1,560 million at DL, US$892 million at DIFL and US$180 million at DPL.
IMPROVING MATURITY PROFILE
The debt maturity profile has been extended with DGL's US$1.5 billion issuance due 2020 done last year and the proposed DL issuance. Following the completion of the proposed offering, Digicel will not face any significant maturity until FY2018. Before this date the largest maturity in a single year should be close to US$300 million. Cash balances of US$353 million as of Dec. 31, 2012 further supports liquidity.
A negative rating action could be triggered if consolidated leverage at DGL approaches 6.0x. While refinancing risk should be eased with the proposed transaction, inability to refinance in advance sizeable bullet maturities in the medium to longer term could pressure credit quality. Positive factors for credit quality would be a sustained reduction in gross leverage at DGL to about 4.0x or below and an increase in free cash flow generation.
Fitch currently rates DGL, DL and DIFL as follows:
--Long-term IDR 'B'
--US$1.5 billion 8.875% senior subordinated notes due 2020
--US$775 million 10.5% senior subordinated notes due 2018
--Long-term IDR 'B';
--US$800 million 8.25% senior notes due 2017 'B/RR4';
--US$510 million 12% senior notes due 2014 'B/RR4';
--US$250 million 7% senior notes due 2020 'B/RR4'.
--Long-term IDR 'B';
--Senior secured credit facility 'B+/RR3'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Telecoms Companies' (Aug. 09, 2012);
--'Corporate Rating Methodology'(Aug. 08, 2012);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Aug. 14, 2012);
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities within a Corporate Group Structure)'(Aug. 08, 2012).
Applicable Criteria and Related Research:
Rating Telecom Companies
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Parent and Subsidiary Rating Linkage