Busi­ness­man De­nis O’Brien is set to lose his ma­jor­i­ty stake in Dig­i­cel Ltd, the tele­coms gi­ant he found­ed, as part of a plan to cut the com­pa­ny’s debt by US$1.8 bil­lion.

The pro­posed move comes days af­ter in­ter­na­tion­al agency Fitch Rat­ings down­grad­ed Dig­i­cel’s Long Term Is­suer De­fault rat­ing for the third con­sec­u­tive time in less than a year.

Dig­i­cel Ltd’s IDR was down­grad­ed from B- to CCC+ in April last year, then to CCC- in Sep­tem­ber, and now to CC.

Ac­cord­ing to Fitch’s rat­ing scale, CC sig­ni­fies “Very high lev­els of cred­it risk” and that de­fault of some kind ap­pears prob­a­ble. How­ev­er, de­spite this sit­u­a­tion Dig­i­cel in re­sponse to emailed ques­tions from the Busi­ness Guardian as­sured that its op­er­a­tions in T&T have not been af­fect­ed and would con­tin­ue as nor­mal.

FITCH RAT­INGS

Last week apart from Dig­i­cel Ltd, Fitch Rat­ings al­so down­grad­ed its par­ent com­pa­ny and an­oth­er sub­sidiary.

“Fitch Rat­ings has down­grad­ed the Long-Term Is­suer De­fault Rat­ing (IDR) of Dig­i­cel Group Hold­ings Ltd (DGHL) to ‘CC’ from ‘CCC-’ as well as the IDR of Dig­i­cel Lim­it­ed (DL) to ‘CC’ from ‘CCC-’. Fitch al­so down­grad­ed the IDR of Dig­i­cel In­ter­na­tion­al Fi­nance Ltd (DI­FL) to ‘CC’ from ‘CCC+’,” Fitch stat­ed in its lat­est rat­ing of Dig­i­cel Group Hold­ings and its sub­sidiaries.

“The down­grade of DL re­flects its very high cred­it risk due to lim­it­ed liq­uid­i­ty to pay off its $925 mil­lion un­se­cured notes ma­tur­ing in March 2023. DL 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,” it stat­ed.

“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.

“Haiti’s macro­eco­nom­ic weak­en­ing, re­sult­ing from its fu­el cri­sis, has fur­ther pres­sured DI­FL’s op­er­at­ing per­for­mance, which Fitch ex­pects will re­main weak in FY 2024. DI­FL has US $2.2 bil­lion of debt ma­tu­ri­ties com­ing due in May 2024. Fitch has ap­plied an an­a­lyt­i­cal over­lay to its rat­ing ap­proach un­der its Par­ent and Sub­sidiary Link­age Rat­ing Cri­te­ria giv­en the high­er risk to DI­FL from the group’s dis­tressed sit­u­a­tion,” it stat­ed.

As a re­sult of the sit­u­a­tion, Dig­i­cel said it had ap­proached in­vestors for an ini­tial 30-day grace pe­ri­od to help the com­pa­ny avoid de­fault as its earn­ings con­tin­ue to be af­fect­ed by po­lit­i­cal un­rest in Haiti.

“Dig­i­cel is in con­struc­tive dis­cus­sions with over 75 per cent of the hold­ers of Dig­i­cel Ltd’s 6.750 per cent se­nior notes who have agreed to a 30-day grace pe­ri­od, that will au­to­mat­i­cal­ly be ex­tend­ed to 90 days if the com­pa­ny en­ters in­to a re­struc­tur­ing sup­port agree­ment with a req­ui­site ma­jor­i­ty of note hold­ers,” Dig­i­cel told the Busi­ness Guardian.

“The grace pe­ri­od pro­vides Dig­i­cel with the flex­i­bil­i­ty to con­tin­ue con­struc­tive and on­go­ing dis­cus­sions, aimed at se­cur­ing a more sus­tain­able cap­i­tal struc­ture for the Group in light of the im­pact on group earn­ings of on­go­ing un­rest in Haiti. As dis­cus­sions are con­fi­den­tial the com­pa­ny can­not com­ment fur­ther at this time, but ad­di­tion­al up­dates will be pro­vid­ed as ap­pro­pri­ate. In the in­ter­im, Dig­i­cel’s op­er­a­tions in each mar­ket through-out the Caribbean con­tin­ue to trade as nor­mal,” it stat­ed.

Ac­cord­ing to Fitch Rat­ings, Dig­i­cel’s IDRs re­flect the in­creas­ing like­li­hood that the group will en­ter a debt re­struc­tur­ing with cred­i­tors.

In fact, ac­cord­ing to Fitch a rat­ing up­grade is un­like­ly be­fore a debt re­struc­tur­ing. There is the pos­si­bil­i­ty, how­ev­er, of the or­gan­i­sa­tion be­ing fur­ther down­grad­ed.

“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’,” it stat­ed.

“A fil­ing for bank­rupt­cy pro­tec­tion would lead to a down­grade to ‘D’,” Fitch stat­ed.

Ac­cord­ing to Fitch, its re­cov­ery analy­sis as­sumes that DGHL would be re­or­gan­ised as a go­ing con­cern in bank­rupt­cy rather than liq­ui­dat­ed.

Fitch has as­sumed a 10 per cent ad­min­is­tra­tive claim.

“The go­ing con­cern EBIT­DA re­flects Fitch’s es­ti­mates of mid-cy­cle EBIT­DA that is achiev­able in the medi­um term, giv­en the com­pa­ny’s po­si­tion pri­mar­i­ly in du­op­oly mar­kets and its growth prospects un­der a sce­nario of on­ly grad­ual cur­ren­cy de­pre­ci­a­tion. This go­ing con­cern EBIT­DA of US$550 mil­lion is ap­prox­i­mate­ly equal to Fitch’s pro­jec­tion for fis­cal 2024,” it stat­ed.

Fitch us­es an en­ter­prise val­ue/EBIT­DA mul­ti­ple of 5.0x, re­flect­ing the com­pa­ny’s long-term prospects and good mar­ket shares in most­ly du­op­oly mar­kets amid a sce­nario of fi­nan­cial dis­tress.

PRO­POSED TRANS­AC­TION

In a re­lease is­sued yes­ter­day, Dig­i­cel Ltd an­nounced it had reached an agree­ment in prin­ci­ple with a com­mit­tee of its cred­i­tors re­gard­ing the key terms of a trans­ac­tion to com­pre­hen­sive­ly re­duce the com­pa­ny’s debt.

Dig­i­cel stat­ed that the dis­cus­sion re­mains on­go­ing to ne­go­ti­ate de­fin­i­tive doc­u­men­ta­tion.

“Since short­ly af­ter the com­ple­tion of the sale of Dig­i­cel Pa­cif­ic in Ju­ly 2022, the com­pa­ny has been ac­tive­ly en­gaged with its key cred­i­tors. While par­ties ini­tial­ly sought sole­ly to ex­tend the ma­tu­ri­ty of the DL 6.750 per cent Se­nior Notes due March 1, 2023 the de­te­ri­o­rat­ing and un­prece­dent­ed sit­u­a­tion in Haiti since Sep­tem­ber 2022 led the com­pa­ny to shift its fo­cus to a more holis­tic so­lu­tion for the Com­pa­ny’s cap­i­tal struc­ture,” it stat­ed.

Dig­i­cel stat­ed that ac­cord­ing­ly, dis­cus­sions have since fo­cused on a com­pre­hen­sive trans­ac­tion.

“The Com­pa­ny and an ad hoc group of crossover hold­ers (AHG), hold­ing ap­prox­i­mate­ly 50 per cent of the Com­pa­ny Debt have sub­se­quent­ly reached an agree­ment in prin­ci­ple on the key terms of the Pro­posed Trans­ac­tion that com­pre­hen­sive­ly ad­dress­es the Com­pa­ny’s debt and en­sures busi­ness con­ti­nu­ity and un­in­ter­rupt­ed ser­vice to cus­tomers,” it stat­ed.

Dig­i­cel stat­ed that the AHG are ma­te­r­i­al debt hold­ers of the Com­pa­ny, own­ing ap­prox­i­mate­ly 78 per cent of the DL Notes and ap­prox­i­mate­ly 58 per cent of Dig­i­cel In­ter­na­tion­al Fi­nance Ltd’s Sub­or­di­nat­ed Notes due 2026, ap­prox­i­mate­ly 64 per cent of the DI­FL Un­se­cured Notes due 2025, ap­prox­i­mate­ly 39 per cent of the DI­FL Se­cured Notes due 2024 and ap­prox­i­mate­ly 35 per cent of the DI­FL Term Loans due 2024, and ap­prox­i­mate­ly 41 per cent in ag­gre­gate of Dig­i­cel Group Hold­ings Ltd’s Se­nior Un­se­cured notes due 2025 and DGHL’s Per­pet­u­al Con­vert­ible Notes.

“The Pro­posed Trans­ac­tion is sub­ject to de­fin­i­tive doc­u­men­ta­tion and oth­er re­quire­ments, as ap­plic­a­ble, and there can be no as­sur­ances that it will be con­sum­mat­ed. The Pro­posed Trans­ac­tion would, if and when con­sum­mat­ed, re­duce the Group’s con­sol­i­dat­ed debt by ap­prox­i­mate­ly $1.8 bil­lion and re­duce its an­nu­al cash in­ter­est by ap­prox­i­mate­ly $110 mil­lion while en­sur­ing suf­fi­cient cash to fund op­er­a­tions and in­vest in key growth ar­eas,” Dig­i­cel stat­ed.

O’Brien en­dorsed the Pro­posed Trans­ac­tion as a pos­i­tive out­come for the busi­ness.

Ac­cord­ing to Dig­i­cel, O’Brien would re­main ac­tive­ly in­volved in the busi­ness as a di­rec­tor and re­tain an eq­ui­ty in­ter­est in the re­cap­i­talised busi­ness.

Dig­i­cel said it con­tin­ues to en­gage in pro­duc­tive ne­go­ti­a­tions with Hold­ers re­gard­ing the Pro­posed Trans­ac­tion, in­clud­ing, among oth­ers, with ad­di­tion­al hold­ers of the DI­FL se­cured in­debt­ed­ness.

“While no de­fin­i­tive agree­ment con­cern­ing the ma­te­r­i­al terms of the Pro­posed Trans­ac­tion has been reached and no as­sur­ances can be pro­vid­ed that an agree­ment will be reached, based on mo­men­tum to date and agree­ment in prin­ci­ple on key terms, the Com­pa­ny be­lieves a con­sen­su­al and com­pre­hen­sive re­struc­tur­ing is achiev­able.

THE NOTES CON­SENT SO­LIC­I­TA­TION

Dig­i­cel said it had re­ceived the req­ui­site con­sent from hold­ers of the Notes to ef­fect cer­tain pro­posed amend­ments to the in­den­ture gov­ern­ing the Notes.

“The Pro­posed Amend­ments pro­vide for a 30-day grace pe­ri­od, which will au­to­mat­i­cal­ly be ex­tend­ed to 90 days if DL en­ters in­to a re­struc­tur­ing sup­port agree­ment with hold­ers of at least a ma­jor­i­ty of the out­stand­ing Notes dur­ing such 30-day pe­ri­od, be­fore a de­fault in the pay­ment of in­ter­est, cer­tain ad­di­tion­al amounts, prin­ci­pal or pre­mi­um with re­spect to the Notes con­sti­tutes an “Event of De­fault,” as de­fined in the In­den­ture,” it stat­ed.

The con­sent so­lic­i­ta­tion ex­pired at 5 pm, New York City time, on Feb­ru­ary 27.

“Dig­i­cel has been ad­vised by Epiq Cor­po­rate Re­struc­tur­ing, LLC, the in­for­ma­tion and tab­u­la­tion agent for the con­sent so­lic­i­ta­tion, that as of the Ex­pi­ra­tion Date, con­sents were valid­ly de­liv­ered and not valid­ly re­voked in re­spect of ap­prox­i­mate­ly 88 per cent in ag­gre­gate prin­ci­pal amount of the Notes. As a re­sult, DL, the guar­an­tors of the Notes and Deutsche Bank Trust Com­pa­ny Amer­i­c­as, as trustee, en­tered in­to a sup­ple­men­tal in­den­ture dat­ed as of Feb­ru­ary 27, 2023 im­ple­ment­ing the Pro­posed Amend­ments,” it stat­ed.

LIQ­UID­I­TY AND DEBT STRUC­TURE

Weak Liq­uid­i­ty: DL faces US $925 mil­lion in note ma­tu­ri­ties in March 2023. The sub­sidiary has min­i­mal cash, as US $90 mil­lion of the US $96 mil­lion of DL’s con­sol­i­dat­ed cash was at DI­FL and its sub­sidiaries at Sep­tem­ber 30, 2022. DI­FL faces US $2.2 bil­lion in se­cured debt ma­tu­ri­ties in May 2024 and is pro­ject­ed to gen­er­ate neu­tral FCF in Fis­cal year 2024. DGHL’s stand­alone cash was US $315 mil­lion as of De­cem­ber 2022.

DGHL’s con­sol­i­dat­ed fi­nan­cial debt as of Sep­tem­ber 2022 was ap­prox­i­mate­ly US $4.4 bil­lion, of which US $2.8 bil­lion was at DI­FL, US $1.0 bil­lion at DL and US $600 mil­lion at DGHL.

In ad­di­tion, about US $100 mil­lion of in­ter­est has ac­crued. DGHL’s debt in­cludes US $215 mil­lion of pay­ment-in-kind per­pet­u­al con­vert­ible notes. Ap­prox­i­mate­ly US $1.2 bil­lion of DI­FL’s US $2.2 bil­lion of debt ma­tur­ing in 2024 is fixed-rate debt at risk of re­set­ting at high­er rates.

KEY RAT­INGS DRI­VERS HIGH­LIGTHED BY FITCH

Very High Cred­it Risk: DL has lim­it­ed liq­uid­i­ty to face $925 mil­lion un­se­cured notes ma­tur­ing in March 2023. The com­pa­ny’s con­sent so­lic­i­ta­tion to amend the notes’ in­den­ture con­tem­plates the es­tab­lish­ment of a 30-day grace pe­ri­od be­fore a de­fault in the pay­ment of in­ter­est or prin­ci­pal con­sti­tutes an event of de­fault as de­fined in the 2023 notes. The grace pe­ri­od can be ex­tend­ed up to 90 days should the com­pa­ny en­ter in­to a re­struc­tur­ing sup­port agree­ment with its cred­i­tors.

Un­sus­tain­able Lever­age: The group’s op­er­at­ing per­for­mance will be af­fect­ed by the macro­eco­nom­ic weak­ness in Haiti. The elim­i­na­tion of fu­el sub­si­dies in the is­land has in­duced protests and fu­el short­ages, which have dis­rupt­ed the group’s abil­i­ty to pro­vide un­in­ter­rupt­ed cov­er­age and have al­so in­creased costs as its cell sites run on Diesel. 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.

Rat­ing Equal­i­sa­tion: Fitch has ap­plied an an­a­lyt­i­cal over­lay to its rat­ing ap­proach to DI­FL, DL and DGHL un­der Par­ent and Sub­sidiary Link­age Rat­ing Cri­te­ria as the three en­ti­ties are ex­pe­ri­enc­ing a dis­tressed sit­u­a­tion giv­en that over 70% of the debt with­in the group is ma­tur­ing with­in the next 18 months. This has re­sult­ed in the three en­ti­ties IDRs equalised at the same lev­el.

Vary­ing Re­cov­ery Prospects: Fitch fore­casts re­cov­ery rates com­men­su­rate with ‘RR1’ for DI­FL se­cured cred­i­tors due their close­ness to the as­sets and out­stand­ing re­cov­ery prospects while DI­FL un­se­cured cred­i­tors’ re­cov­ery is fore­cast at ‘RR3’. All of these debt in­stru­ments are capped at ‘RR4’, re­sult­ing in rat­ings equal to the IDRs. Fitch’s Coun­try-Spe­cif­ic Treat­ment of Re­cov­ery Rat­ings Cri­te­ria con­strains the up­ward notch­ing of in­stru­ments based on con­cerns about the rule of law, in­sol­ven­cy regimes and cred­i­tor pro­tec­tions in a ju­ris­dic­tion. The rat­ings of the DI­FL sub­or­di­nat­ed notes, se­nior un­se­cured debt and DGHL’s un­se­cured and con­vert­ible debt re­flect poor re­cov­ery prospects.

ESG—Gov­er­nance Struc­ture: Dig­i­cel’s de­ci­sion to re­struc­ture debt twice re­mains a con­straint on the rat­ings and its cor­po­rate gov­er­nance is deemed weak. The group has a con­cen­trat­ed own­er­ship and con­trol struc­ture with a sin­gle share­hold­er who owns and con­trols the group and is heav­i­ly in­volved in the day-to-day op­er­a­tions of the busi­ness.

ESG—Group Struc­ture: Dig­i­cel’s in­cor­po­ra­tion sta­tus in dozens of coun­tries and ex­ten­sa use of con­trac­tu­al fea­tures of debt re­sults in a com­plex group struc­ture that weak­ens its cor­po­rate gov­er­nance and the group’s con­sol­i­dat­ed cred­it pro­file.