DIGICEL has asked investors possessing US$925-million worth of its bonds to forego payments for at least 30 days to help the company avoid default as its earnings continue to be affected by political unrest in Haiti and its cash flow remains unsustainable compared to the level of its debt.

The bonds in question are due to be repaid on March 1. A Digicel Group spokesperson confirmed that more than 70 per cent of bondholders have signalled they will agree to the 30-day grace period. That is well above the 50.1 per cent threshold needed.

Digicel has been in talks with large holders of its bonds since last year about the prospect of swapping the notes for longer-dated paper, with the aim of putting the outcome to all investors in the bonds. It has since broadened the discussions to look at the group’s wider debt pile, with more than 80 per cent of its US$4.55 billion of bonds and corporate loans due to mature by the end of 2025.

The spokesperson also said the bondholders are willing to extend the grace period to 90 days if Digicel enters a restructuring support agreement.

“Digicel and its advisers remain in ongoing and constructive discussions with approximately 50 per cent of the group’s bondholders, including a substantial majority of holders of Digicel Limited’s Senior 2023 Notes. On February 21st, Digicel Limited launched a consent solicitation relating to the company’s 6.750 per cent senior notes due 2023, seeking consent for an initial 30-day grace period which could be extended to 90 days in certain circumstances. As of the date of the consent solicitation, the beneficial owners of more than 70 per cent of the outstanding principal amount of the notes had already committed to the company that they will consent to the proposed amendments. The approval threshold is 50.1 per cent of the outstanding principal amount of the notes,” a statement from the telecommunications provider outlined.

“As discussions are confidential and ongoing, we cannot comment further at this time,” Digicel further informed Jamaica Observer in response to queries.

The proposed grace period is, however, expected to provide the company with additional flexibility to facilitate restructuring. This would be the third debt restructuring undertaken by Digicel since early 2019 and comes at a time when interest rates are rising around the world.

The senior unsecured bonds, which are scheduled to mature on March 1, have been trading below 40 cents on the dollar since late November, with creditors concerned about the company’s ability to repay the debt in full and on time.

DIGICEL CREDIT RATING

But with the telecoms provider not being able to meet its obligations to bondholders on March 1 as agreed, Fitch Ratings on Wednesday downgraded the Long-Term Issuer Default Rating (IDR) of Digicel Group Holdings Limited (DGHL) to ‘CC’ from ‘CCC-‘. It also downgraded the IDR of Digicel Limited to ‘CC’ from ‘CCC-‘ and the IDR of Digicel International Finance Limited (DIFL) to ‘CC’ from ‘CCC+’.

At the same time, the rating agency indicated that a ratings upgrade is unlikely prior to a debt restructuring. It added that the “entrance into a grace or cure period following non-payment of a material financial obligation or the announcement of a distressed debt exchange would lead to a downgrade to ‘C'”. Digicel was also warned that if it filed for bankruptcy protection then it would be downgraded to ‘D’, which is the lowest rating grade from Fitch of its 11 rating grades. which go from AAA to D.

For now, though, Fitch said it decided to apply the same ‘CC’ ratings to the three entities — Digicel International Finance Limited, Digicel Limited and Digicel Group Holdings Limited — under parent and subsidiary linkage rating criteria as the three entities are experiencing a distressed situation given that over 70 per cent of the debt within the group is maturing within the next 18 months.

It noted that “the downgrade of Digicel Limited reflects its very high credit risk due to limited liquidity to pay off its $925-million unsecured notes maturing in March 2023. Digicel Limited has launched a consent solicitation to amend the notes’ indenture to provide a 30-day grace period that could be extended to 90 days if the company enters into a restructuring agreement with creditors.”

In addition, it said the downgrade of DIFL reflects the increasing risk of a comprehensive restructuring with incremental debt being added to its capital structure or otherwise resulting in an outcome deemed by Fitch to be a distressed debt exchange.

It added that Haiti’s macroeconomic weakening, resulting from its fuel crisis, has further pressured DIFL’s operating performance, which is expected to remain weak in 2024. DIFL has US$2.2 billion of debt maturities coming due in May 2024.

The current downgrade and any further downgrades will affect the interest rate Digicel will have to offer creditors to accept debt restructuring. Digicel bonds are rated as junk.

Fitch said it expects that with restructuring Digicel Group would be reorganised as a going concern in bankruptcy rather than liquidated. It estimated a going concern earnings before interest, taxes, depreciation and amortisation (EBITDA) of US$550 million, which it said is approximately equal to its projection for fiscal 2024.

HAITI IMPACT

Haiti, Digicel’s biggest market, has been facing challenges since the elimination of fuel subsidies induced protests and fuel shortages, which have disrupted the telecom provider’s ability to provide uninterrupted coverage and have also increased costs as its cell sites run on diesel.

Digicel warned late last year that public unrest and economic disruption in Haiti would mean earnings in that market would slump by as much as two-thirds in the second half of its financial year to March. The earnings have been projected in the range of US$25 million to US$35 million. This would reduce the group’s full-year earnings before interest, tax, depreciation and amortisation to about US$700 million.

The reality on the ground increases the risk of Digicel entering a comprehensive debt restructuring, especially with cash flow falling precipitously. The restructuring is also complicated by the fact that global interest rates are rising, especially in the US junk bond market where Digicel seeks most of its debt funding.

The Haitian gourde has continued to depreciate in 2023. Fitch forecasts DGHL’s consolidated net leverage around 8.0x in fiscal year-end 2024, considering proforma debt of US$4.5 billion, cash declining to less than US$300 million from close to US$500 million as of September 2022, and operating EBITDA of around US$550 million in fiscal year-end 2024 from US$580 million in fiscal year-end 2022.

The company, which operates in 25 markets across the Caribbean and Central America after selling its Pacific unit last year, convinced holders of $3 billion of bonds in early 2019 to postpone getting their money back by two years. However, that accord was struck well in advance of the original bonds’ scheduled maturity dates in 2020 and 2022, respectively.

Digicel subsequently moved in early 2020 to impose US$1.6 billion of debt write-offs on bondholders, arguing they would have fared much worse in the event of a liquidation of the over-indebted company at the time. However, holders of the March 2023 bonds refused to share the losses at the time of that debt restructuring. The company had managed to chip US$1.2 billion off its debt pile last year with initial proceeds from the sale of its Pacific unit in July.