MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned a 'B/RR4(exp)' rating to Digicel Limited (DL) proposed US$250 million senior notes due 2020. Proceeds from the notes are expected to be used for general corporate uses including acquisitions.
Fitch currently rates Digicel Group Limited (DGL), DL and Digicel International Finance Limited (DIFL), collectively referred to as 'Digicel', as follows:
DGL
--Long-term Issuer Default Rating (IDR) at 'B';
--US$1 billion 8.875% senior subordinated notes due 2015 at 'B-/RR5';
--US$415 million 9.125/9.875% senior subordinated toggle notes due 2015 at 'B-/RR5';
--US$775 million 10.5% senior subordinated notes due 2018 at 'B-/RR5'.
DL
--Long-term IDR at 'B';
--US$800 million 8.25% senior notes due 2017 at 'B/RR4';
--US$510 million 12% senior notes due 2014 at 'B/RR4'.
DIFL
--Long-term IDR at 'B';
--Senior secured credit facility at 'B+/RR3'.
The Rating Outlook is Stable.
Digicel's ratings incorporate a solid operating performance, increasingly diversified revenue and cash flow generation, improved free cash flow generation 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, medium term refinancing risk and exposure of operations to low rated countries.
Under Fitch's approach to rating entities within a corporate group structure, the IDRs of DGL, DL and 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 DL reflecting its above average recovery prospects. DL 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.
Fitch views as positive to credit quality the overall long term effect of the transaction with America Movil. In Fitch's opinion, Digicel will strengthen its competitive position in Jamaica which is the most important country in terms of EBITDA generation of the company, despite losing some cash flow diversification. Digicel has concluded the sale of Honduran operation and the acquisition of the operation in Jamaica. The transaction in El Salvador is in the process of receiving approvals by local authorities. The economics of the overall transaction still remain at US$355 million, which Fitch estimates that the biggest part of this will be received by Digicel after the sale of the operation in El Salvador is finished.
Over the past several years, DGL has diversified its cash flow generation and asset base leading to lower business risk. The EBITDA lost from the sale of the El Salvador asset sale is expected to be offset over the medium to long term with the integration of Claro Jamaica. Additionally, Fitch expects that growth in EBITDA from Papua New Guinea (PNG) should further diversify cash flow generation from Jamaica and Haiti in the coming years. Pro forma cash flow coming from Jamaica and Haiti remains material at a Fitch estimated 45%, although lower than in the past as DPL EBITDA grows. These economies are more vulnerable than others where Digicel operates. The most important contributors to EBITDA are Jamaica, Haiti, Trinidad & Tobago, Eastern Caribbean operations and PNG.
Fitch expects positive free cash flow (FCF) in the coming years as funds from operations (FFO) modestly grows, even considering higher capex than previous years. FCF should be driven by slightly growing EBITDA in the next few years and regular dividend payments should remain close to US$40 million. Digicel expects that for the near future the company will not raise its 43.4% stake in DHCAL, which will only remain with the operation in Panama after the deal with America Movil is closed.
Leverage at DGL remains high but expected to gradually decline in the medium term, as EBITDA grows and indebtedness remains relatively stable. Considering the DIFL extension, AMX transaction, indebtedness as of Sept. 30, 2011 and last 12 months (LTM) EBITDA, the pro forma total debt to EBITDA is close to 5.0 times (x) and net debt to LTM EBITDA should be close to 4.2x. Total pro forma debt of approximately US$4.9 billion is not expected to not materially change its allocation over the medium term. Pro forma debt is allocated as follows: US$2,190 million at DGL, US$1,560 million at DL, US$919 million at DIFL and US$247 million at DPL.
Digicel does not face any material debt maturity over the next two years, however refinancing risk starts to rise as 2014 and 2015 approaches. The company faces bullet maturities at DL of US$510 million in April 2014 and DGL of US$1.4 billion in notes maturing January 2015. Inability to refinance in advance these maturities will pressure liquidity and the ratings.
Additional information is available '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 Global Telecoms Companies', Sept. 16, 2010;
--'Corporate Rating Methodology', Aug. 12, 2011;
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers', May 13, 2011;
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)', Aug. 12, 2011.
Applicable Criteria and Related Research:
Rating Global Telecoms Companies - Sector Credit Factors
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
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