INTERNATIONAL rating agency Fitch has upgraded the following ratings for Digicel Group Limited (DGL), Digicel Limited (DL) and Digicel International Finance Limited (DIFL), collectively referred to as Digicel, as follows:

DGL:

— US$1 billion 8.875% senior subordinated notes due 2015 to ‘B-/RR5’ from ‘CCC+/RR5’;

— US$415 million 9.125/9.875% senior subordinated toggle notes due 2015 to ‘B-/RR5’ from ‘CCC+/RR5’;

— US$775 million 10.5% senior subordinated notes due 2018 to ‘B-/RR5’ from ‘CCC+/RR5’.

DL:

— Long-term Issuer Default Rating (IDR) to ‘B’ from ‘B-‘;

— US$800 million 8.25% senior notes due 2017 to ‘B/RR4’ from ‘B-/RR4’;

— US$510 million 12% senior notes due 2014 to ‘B/RR4′ from B-/RR4’.

DIFL:

— Senior secured credit facility to ‘B+/RR3’ from ‘B/RR3’.

In addition, Fitch has assigned long-term IDRs of ‘B’ to both DGL and DIFL. The Rating Outlook is Stable.

Strong operating performance

According to Fitch’s primary analyst, Sergio Rodriguez, the rating actions reflect Digicel’s continued strong operating performance, increasingly diversified revenue and cash flow generation, improved free cash flow generation and expectation of stable credit metrics. Digicel’s ratings are supported by its position as the leading provider of wireless services in most of its markets and strong brand recognition. The ratings are tempered by continued high leverage and exposure to politically unstable countries and economies.

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’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.

Transaction with America Movil Positive for Digicel

Fitch views the overall long-term effect of the transaction with America Movil as positive to credit quality. In Fitch’s opinion, Digicel will strengthen its competitive position in Jamaica, which is the most important country in terms of EBITDA generation for the company, despite losing some cash flow diversification. Digicel will sell its El Salvador unit and the business unit in Honduras; the latter belongs to affiliate Digicel Holdings (Central America) Limited (DHCAL), in which DGL owns 43.4 per cent. In exchange for this, Digicel will receive US$355 million in cash, of which US$185 million will be used to repay project finance debt in Honduras and America Movil’s Jamaican unit, Claro Jamaica.

Over the past several years, DGL has diversified its cash flow generation and asset base leading to lower business risk, even when considering the sale of the El Salvador operation to America Movil. The EBITDA loss from El Salvador is expected to be offset over the medium to longterm 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 estimate of 45 per cent, although lower than in the past.

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 grow, even considering higher capex than previous years. FCF should be driven by slightly growing EBITDA in the next few years and dividend payments should remain close to US$40 million. Digicel expects that for the near future the company will not raise its stake in DHCAL, which will only remain with the operation in Panama after the deal with America Movil is closed.

According to secondary analyst, Alfonso Reyes, leverage at DGL remains high but is expected to gradually decline in the medium term, as EBITDA grows and indebtedness remains relatively stable. Considering 12 months EBITDA for DPL as of Dec 31, 2010, pro forma total debt to EBITDA is 4.9 times (x). Fitch expects total debt of approximately US$4.6 billion to not materially change its allocation over the medium term. Debt is allocated as follows: US$2,190 million at DGL, US$1,310 million at DL, US$813 million at DIFL and US$279 million at DPL. In Fitch’s opinion, the debt maturity profile is manageable over the next three years given the expected FCF generation and cash balances of US$683 million plus the cash coming from America Movil. The most significant bullet maturities consist of DL’s US$510 million due in April 2014 and DGL’s US$1.4 billion in notes maturing January 2015. The inability to refinance in advance at least a portion of these maturities will pressure liquidity.

DL’s outstanding 2014 and DGL’s 2015 notes are guaranteed by all existing wholly owned subsidiaries that historically are guarantors of DL’s debt. T&T and Haiti are not included among these guarantors; however, the cash flows from these subsidiaries are available to DIFL to pay its obligations, including its guarantee of the DL notes. The secured DIFL facility has a US$100 million revolving facility of which US$56 million is undrawn, adding flexibility to the company’s liquidity position. The DIFL facility is secured by a first priority lien by all shares and assets of Digicel.