Digicel Prices Plunge as Refinancing Risk Increases

We are reiterating our SELL recommendation on Digicel Ltd and Digicel Group. Despite on-going efforts to reduce costs, generate cash through asset sales and a transition to the higher margin fibre business, financial performance continues to deteriorate.   In addition, the credit profiles of both entities remain weak and efforts so far to refinance impending maturities have not yet borne fruit. 

Investor sentiment surrounding the Digicel bonds has become even more negative given the company’s failure to secure refinancing for the 2020 bonds and deteriorating financial performance. In particular, the concerns stem from the limited time remaining for the Digicel entities to refinance debt which is expected to become even more challenging in the current rising interest rate environment.  Importantly, combined Digicel Limited and Digicel group has a total of US$6.5Bn in bonds with a maturity occurring every year from 2020 through 2023. The elevated risks are already being priced in with investors demanding higher yields on the telecom company’s bonds. Further, a recent conference call to discuss its latest financial performance did little to quell fears or inspire investor confidence.   The company’s performance for FY18 continued to deteriorate with revenue and EBITDA declining year-on-year despite cost-cutting measures that have been implemented. The company’s over-leveraged balance sheet also inhibits its ability to secure much-needed refinancing. 

Recommendation

Despite on-going efforts to reduce costs, no significant benefit has been realized in the company’s performance, and the company’s transition to fibre has not moved the needle on revenues or EBITDA.   In addition, the company’s credit profile remains weak and its efforts so far to refinance impending maturities have not been fruitful, causing much concern.  We therefore continue to recommend that investors reduce their exposure to (SELL) Digicel. Investors could consider purchasing Mexico’s Unifin Financiera[1] 7% 2025 (S&P Rating: BB/Stable) which is a higher quality credit offering a yield to call of 9.22% [2].

 

[1] Unifin Financiera is one of the largest unregulated non-bank financial institutions (NBFIs) in Latin America in terms of loans and assets. The company’s core business involves providing operating leases to the SME sector, factoring and auto loans.

[2] The next call date is July 15, 2021