MONTERREY, Mexico--(BUSINESS WIRE)--Fitch 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'
--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';
--US$250 million 7% senior notes due 2020 at 'B/RR4'.
DIFL
--Long-term IDR at 'B'
--Senior secured credit facility at 'B+/RR3'.
The Rating Outlook is Stable.
The rating actions incorporate Digicel's strong operating performance, diversified revenue and cash flow generation, free cash flow (FCF) 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 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.
Acquisitions Improving Competitive Position:
Fitch view the recent acquisitions of Voila in Haiti and the transaction with America Movil, where the El Salvador leg is pending on regulatory approval, to strengthen the company's competitive position in its top markets, Jamaica and Haiti. In Fitch's opinion the transaction with America Movil, will strengthen Digicel competitive position in Jamaica which is the most important country in terms of EBITDA generation of the company, despite losing some cash flow diversification from El Salvador and Honduras. In addition the company is focusing in diversifying its revenues by targeting information and communications technology and telecommunications (ICT) services for corporate post-paid customers. For this reason Digicel acquired a 51% ownership in Nextar based in Puerto Rico on February of 2011, and on October of 2010 acquired a 100% ownership in Data Nets based in PNG.
Over the past several years, DGL has diversified its cash flow generation and asset base, leading to lower business risk. Additionally, growth in EBITDA from Papua New Guinea (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, underpinned by PNG. For the 12 months ended Dec. 31, 2011 DPL contributed approximately 18.5% of DGL's EBITDA. The most important contributors to DGL's EBITDA are Jamaica, Haiti, Trinidad & Tobago, Eastern Caribbean operations and PNG.
Lower capital expenditures (capex) should have a positive effect on free cash flow (FCF) amid a stable dividend policy of US$40 million per year. Fitch expects positive FCF in the coming years as funds from operations (FFO) modestly grows and capex peaks in FY2012 as the company does more of its 4G(HSPA+) rollouts. Capex to revenue ratio should approach 17.5% by FY2012 and then trend towards 10% in the next few years. Fitch notes that capex may increase from the previous estimates if the company elects to do 4G LTE rollouts in the coming years. 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 now only remains with the operation in Panama after the deal with America Movil.
Leverage at DGL remains high but expected to gradually decline in the medium term, as EBITDA grows and indebtedness remains relatively stable. As of Dec. 31, 2011 and last twelve months EBITDA, total debt to EBITDA was 4.5 times (x) and net debt to last twelve months EBITDA was 4.1x. Total debt of Dec. 31, 2011 was approximately US$4.5 billion but should approximate to US$5.0 billion considering the extension and amendment of the DIFL facility in January of 2012 and the placement of a bond in February of 2012. Proforma cash balances as of Dec. 31, 2011 were US$796 million. Proforma debt is allocated as follows: US$2,190 million at DGL, US$1,560 million at DL, US$988 million at DIFL and US$238 million at DPL.
Short-term liquidity is manageable. Proforma the extension of DIFL facility, DGL faces US$188 million up to the end of FY2013, with cash balances of US$521 million as of Dec. 31, 2011. Digicel has refinancing needs in calendar year 2014 and 2015. The company faces bullet maturities at DL of US$510 million in April 2014 and at DGL of US$1.4 billion in notes maturing January 2015. Inability to refinance in advance these maturities will pressure liquidity and the ratings.
Contact:
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=677740
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210
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