Fitch Rates Digicel's Proposed USD925MM Senior Notes 'B/RR4(EXP)'

CHICAGO--()--Fitch Ratings expects to rate Digicel Limited's (DL) proposed USD925 million senior notes due 2023 'B/RR4(EXP)'. Proceeds from the issuance are expected to be used mainly to fully redeem its USD800 million 8.25% senior notes due 2017 and to pay for a tender premium for such redemption, as well as the associated accrued interest. Securities rated 'RR4' have characteristics consistent with securities historically recovering 31%-50% of the principal and related interest.

KEY RATING DRIVERS

Digicel's ratings reflect its solid performance and cash flow from operations (CFFO) generation, geographic diversification with a leading market position, strong brand recognition, as well as Fitch's expectation for stable credit metrics over the medium term. The ratings are tempered by its aggressive shareholder distribution, 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 Issuer Default Ratings (IDR) of Digicel Group Limited (DGL) and its subsidiaries, 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

Digicel has generated stable operating results in the first nine months of fiscal year 2015 (FY2015), ending on March 31, 2015, and Fitch expects this trend to continue over the medium term. The company's constant-currency-based revenue posted stable growth of 5% with a solid EBITDA margin of 43% during the period. This was mainly driven by increasing data revenue supporting ARPU, and steady growth in Papua New Guinea (PNG), Trinidad & Tobago, and Other Markets segment. Stable subscriber base expansion continued, with the total subscriber base reaching 13.8 million as of December 2014 from 13.4 million a year ago. Although revenue growth as reported in USD is likely to remain weak due to the local currency depreciation in some of its markets, the operational impact should not be material given the close revenue-cost currency match.

Positive Revenue Diversification

Ongoing revenue diversification away from the traditional mobile voice is positive. The revenue and EBITDA contribution from data-based value-added services (VAS) should continue to steadily increase over the medium term, mitigating negative pressures on the voice segment, which has suffered from a high level of competition and reduced mobile termination rates in some markets. For the quarter ended December 2014, VAS revenues increased by 8% from a year ago, accounting for 27% of service revenues. Increasing smartphone penetration, which rose to 31% as of December 2014 from 20% a year ago, should continue to support this trend. The company has made several acquisitions in the submarine fiber network and cable operations to cope with the data capacity increase and reinforce this strategy.

Digicel's business solutions business also grew strongly by 55% to USD32 million during the quarter ended December 2014 versus a year ago. Revenue contribution is yet to be significant as it represented only 4.7% of the consolidated service revenue in the quarter, but this segment is likely to become a meaningful cash generator over the long term, as the demand outlook is solid.

Negative FCF in and FY2015

Fitch forecasts Digicel to generate negative free cash flow (FCF) in FY2015 due to high capex, despite stable performance. During the year, annual capex is expected to increase to above USD600 million, from USD550 million in FY2014, as a result of network expansion, including cable networks as well as a tower project in Myanmar. Positively, Fitch believes that FCF generation could turn positive from FY2016 as expansionary capex falls in the absence of any sizable special dividend. The capex-to-revenue ratio is expected to trend toward 10% with a stable annual dividend policy of USD40 million in the next few years.

Leverage to Remain Stable

Fitch expects the company's financial leverage to remain stable over the medium term given its high cash balance. Despite forecasted negative FCF and some pending investments, its cash balance of USD512 million at December 2014 should cover any shortfall from CFFO without a significant need for external financing. Therefore, Fitch does not foresee any material increase in the company's gross debt level, which was USD6.4 billion at December 2014. Fitch's base case scenario indicates Digicel's debt-to-EBITDAR ratio to remain in the range of 5.0x-5.5x over the medium term, in line with the current rating level.

Improved Debt Maturities Profile

Digicel's liquidity profile has substantially improved with the the extension of debt maturities of DIFL's USD857 million facility loans during June 2014. Following the extension, the company faces no significant debt maturities until FY2018 when the USD202 million portion of the facility becomes due. These loans were due during FY2015 - FY2017. The proposed notes should also bolster Digicel's liquidity position.

Fitch currently rates DGL and its subsidiaries as follows:

DGL

--Long-term IDR 'B' with a Stable Outlook;

--USD 2 billion 8.25% senior subordinated notes due 2020

'B-/RR5';

--USD 1 billion 7.125% senior unsecured notes due 2022 'B-/RR5'.

DL

--Long-term IDR 'B' with a Stable Outlook;

--USD 800 million 8.25% senior notes due 2017 'B/RR4';

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

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

DIFL

--Long-term IDR a 'B' with a Stable Outlook;

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

RATING SENSITIVITIES

A negative rating action could be considered if consolidated leverage at DGL approaches 6.0x, due to competitive pressures and aggressive capex/shareholder distributions.

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 an increase in FCF generation.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2013);

--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980249

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Contacts

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 Chairperson
Sergio Rodriguez, CFA
+1-52-81-8399-9100
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

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 Chairperson
Sergio Rodriguez, CFA
+1-52-81-8399-9100
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com