News Column

Fitch Affirms Digicel's Ratings; Outlook Stable

May 23, 2014

CHICAGO--(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 as 'Digicel' as follows.

DGL

--Long-term Issuer Default Rating (IDR) at 'B' with a Stable Outlook;

--USD 2 billion 8.25% senior subordinated notes due 2020 at 'B-/RR5';

--USD 1 billion 7.125% senior unsecured notes due 2022 at 'B-/RR5'.

DL

--Long-term IDR at 'B' with a Stable Outlook;

--USD 800 million 8.25% senior notes due 2017 at 'B/RR4';

--USD 250 million 7% senior notes due 2020 at 'B/RR4';

--USD 1.3 billion 6% senior notes due 2021 at 'B/RR4'.

DIFL

--Long-term IDR at 'B' with a Stable Outlook;

--Senior secured credit facility at 'B+/RR3'.

KEY RATING DRIVERS

DGL's ratings reflect its solid performance and cash from operations (CFO) generation, geographic diversification with a leading market position, strong brand recognition, as well as Fitch's expectation for stable credit metrics over the medium term. The ratings are tempered by its aggressive shareholder distribution, high leverage and the exposure of its operations to low rated countries.

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:

DGL has generated stable operating results in the first nine months of fiscal year 2014 (FY2014), ending on March 31, 2014, and Fitch expects this trend to continue over the medium term. The company's constant-currency-based revenue posted modest growth of 3% with its EBITDA margin improving to 45% from 44% during the past year. This was mainly driven by increasing data revenue supporting ARPU, a decline in churn rates, as well as strong growth in Papua New Guinea (PNG), Trinidad & Tobago, and French West Indies. Stable subscriber number growth continued, with the total subscriber base reaching 13.4 million at the end of 2013 from 12.8 million a year ago. Although the revenue growth in the reported USD currency is likely to remain weak due to the local currency depreciation in some of its markets, the operational impact should not be material given the close revenue-cost currency match.

Positive Revenue Diversification:

Ongoing revenue diversification away from the traditional mobile voice is positive. The revenue and EBITDA contribution from data-based value-added services (VAS) will continue to steadily increase over the medium term, mitigating negative pressures on the voice segment, which has suffered from a high level of competition and the reduced mobile termination rates in some markets. For the quarter ended Dec. 31, 2013, VAS accounted for 26% of service revenues, improving from 23% a year ago. Increasing smartphone penetration, which rose to 20% at the end of 2013 from 13% a year ago, should continue to support this trend. The company has made several acquisitions in the submarine fiber network and cable operations to cope with the data capacity increase to reinforce this strategy.

Digicel's ICT business (Information and Communications Technology, mainly business solutions and data management for corporate customers) also grew strongly by 23% to USD21 million during the quarter ended Dec. 31, 2013 from the previous quarter. Revenue contribution is yet to be significant as it represented only 3% of the consolidated revenue in the quarter, but this segment is likely to become a meaningful cash generator over the long term as the demand outlook is solid.

Strong Growth in Papua New Guinea:

PNG continues to grow strongly, offsetting weak growth in other major countries of operation, such as Jamaica and Haiti. In the third quarter ended Dec. 31, 2013, the local-currency-based revenue in PNG grew by 11% on a year-on-year basis, mainly supported by 49% increase in non-SMS data revenue. In addition, Fitch forecasts a steady expansion of the subscriber base in the country, which grew by 7% compared to Dec. 31, 2012, as penetration rates are still low at only 41%. In the first nine months of FY2014, PNG accounted for 17.7% of the total group revenue, based on USD, which was the second largest behind Haiti (18.9%).

Negative FCF in FY2014 and FY2015:

Fitch forecasts Digicel to generate negative free cash flow (FCF) in FY2014 and FY2015 due to high capex and dividends, despite stable performance. In those two years, annual capex is expected to increase to between USD470 million and USD500 million, from USD360 million in FY2013, due to network expansion, including a new tower project in Myanmar. In addition, the company paid a special dividend of USD650 million in February 2014. However, Fitch believes that FCF generation could turn positive from FY2016 as expansionary capex falls in the absence of any sizable special dividend. The capex-to-revenue ratio is expected to trend towards 10% with a stable annual dividend policy of USD40 million in the next few years.

Leverage to Remain Stable:

Fitch expects the company's financial leverage to remain stable over the medium term given its high cash balance. Despite forecasted negative FCF and some pending investments, its cash balance of USD1.5 billion at Dec. 31, 2013 (pro forma USD850 million after special dividend of USD650 million paid in February 2014) should comfortably cover any shortfall from CFO without any significant need for external financing. Therefore, Fitch does not foresee any material increase in the company's gross debt level, which was USD6.1 billion at Dec. 31, 2013. Fitch's base case scenario indicates debt-to-EBITDAR ratio to remain at around 5x over the medium term, in line with the current rating level.

Improved Debt Maturities Profile:

Digicel has successfully extended the debt maturities with its recent issuance of USD1 billion notes due 2022 of which the proceeds were mostly used to redeem USD775 million note that was originally due 2018. The company has a sound liquidity profile as it does not face any significant maturity until 2017 when USD800 million notes become due.

RATING SENSITIVITIES

A negative rating action could be considered if consolidated leverage at DGL approaches 6.0x. While refinancing risk was reduced with the recent note issuances, inability to refinance in advance of the sizeable bullet maturities in the medium- to longer-term could pressure credit quality.

Conversely, a positive rating action could be considered in case of a sustained reduction in consolidated gross leverage to 4.0x or below, and an increase in FCF generation.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 5, 2013;

--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' Nov. 20, 2013;

--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities Within a Corporate Group Structure)', Aug. 5, 2013.

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721836

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831466

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.



Fitch Ratings

Primary Analyst

Alvin Lim, CFA

Director

+1 312-368-3114

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

John Culver, CFA

Senior Director

+1 312-368-3216

or

Committee Chairperson

Sergio Rodriguez, CFA

+1-52-81-8399-9100

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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