MONTERREY, Mexico & NEW YORK--(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';
--US$1.5 billion 8.25% senior subordinated notes due 2020 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$250 million 7% senior notes due 2020 at 'B/RR4';
--US$1.3 billion 6% senior notes due 2021 at 'B/RR4'.
DIFL
--Long term ID) at 'B';
--Senior secured credit facility at 'B+/RR3'.
The Rating Outlook is Stable.
KEY RATING DRIVERS:
Digicel's ratings reflect solid operating performance and CFO generation, diversified revenue, and the 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. 'RR4' rated securities have average recovery prospects given default and characteristics consistent with securities historically recovering 31%-50% of current principal and related interest.
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.
Stable Operating Trends:
Fitch expects value added services (VAS) as a percentage of revenue to continue increasing its share of revenues. Positive trends in VAS have supported revenues and EBITDA growth over the past few quarters, offsetting pressures from traditional voice services in some markets due to reductions in mobile termination rates (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 related to non-SMS. 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.
Fitch estimates that PNG has become the most meaningful market for EBITDA contribution, followed by Haiti and Jamaica. Digicel Pacific Limited (DPL), a subsidiary of DGL, has continued to grow and has generated positive free cash flow (FCF) over the past three years. DPL's operating trends are underpinned by PNG which is now able to pay dividends to DGL. 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 PNG, Haiti, Jamaica, Trinidad & Tobago and French West Indies (FWI).
Temporary High Cash Balances:
After the recent bond issuances, Digicel has high cash balances that are estimated to exceed USD1 billion. Fitch believes that the cash can be used to fund a Digicel-led consortium to participate in the bidding process for two licenses in Myanmar. This should take place during the month of June. In the event the consortium is not awarded with a license, the use of cash balances is still uncertain but Fitch believes it may be used for some debt repayment, additional investments in existing markets and special dividends.
Lower Capex Supporting FCF:
Fitch expects positive FCF in the coming years from existing operations and in the absence of special dividends. Funds from operations (FFO) should grow modestly and capex is expected to decline from its peak in fiscal 2012. The 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 amidst a stable dividend policy of USD40 million per year. DGL paid a USD300 million special dividend during the first quarter of fiscal 2013. 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. Considering the recent bond issuance for USD1.3 billion at DGL's subsidiary DL and consolidated financial data for DGL as of Dec. 31, 2012; pro forma total debt-to-EBITDA is close to 5.0x, while net debt-to-EBITDA should approximate to 4.1x.
Reported leverage as of Dec. 31, 2012 based on last 12 months EBITDA was 4.4x. At DL, total debt-to-EBITDA was 2.8x for this same period. DGL's total pro forma debt is now approximately USD5.7 billion and cash balances approximated USD1.1 million. Consolidated pro forma total debt is allocated as follows: USD2,275 million at DGL, USD2,350 million at DL, USD892 million at DIFL, and US$180 million at DPL.
Improved Maturity Profile:
The debt maturity profile has been extended, with DGL's USD1.5 billion issuance due 2020 done last year and the recent DL USD1.3 billion issuance due 2021. Digicel does not face any significant maturity until fiscal 2018. Before this date the largest maturity in a single year is USD354 million in fiscal 2015. Cash balances of USD353 million as of Dec. 31, 2012 further support liquidity.
RATING SENSITIVITIES:
A negative rating action could be triggered if consolidated leverage at DGL approaches 6.0x. While refinancing risk was reduced with the recent issuances, inability to refinance sizeable bullet maturities in advance 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 FCF generation.
Additional information is available 'www.fitchratings.com'.
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:
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Rating Telecom Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792048
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.