Digicel has had a good year. By the skin of his teeth, it’s looking like Denis O’Brien might avoid having to hand over 49 per cent of the company to bond investors.  

In April last year, Digicel reached a deal with creditors, who accepted a $1.7 billion write down in what they were owed. In exchange, O’Brien put $60 million into the business and issued $200 million of convertible notes. The notes would convert into a 49 per cent stake in the business if Digicel failed to refinance a $920 million bond coming due in March of 2023.

Why did the creditors agree to this deal, which Moody’s described as a “distressed debt exchange, which is a default”? They did it because getting their money back through the courts would have been costly and uncertain. A default would have been the biggest in Caribbean history, spanning many jurisdictions. Rather than go through the legal process, the creditors took the haircut and the new deal. 

The deal got Digicel’s creditors off the company’s back. But the company was still left with a very big pile of debt. Digicel’s net debt is about 6.0 times Ebitda. JP Morgan, the investment bank, calls the business “over-levered”. Digicel’s closest competitor, Liberty Global, has a net debt to Ebitda ratio of 2.8. This time last year, the chances of refinancing the $920 million did not look great.

But Digicel has had a good year. A few things have gone its way. Now, there’s a path to refinancing the $920 million in 2023, and O’Brien keeping control of his business. This week, the ratings agency Fitch recognised this progress and upgraded the credit ratings of some of Digicel’s subsidiaries.

A good year

What has changed? Think back to April 2020, when the deal was done. It was about the scariest point in the whole Covid-19 pandemic. Companies were scrambling for cash, and nobody knew how bad things would get. Digicel was unlucky that the showdown with its creditors, long expected, went down at that particular moment.

Of course, things have turned out relatively okay. Thanks to a lot of help from central banks, the flow of global spending hasn’t dropped. And thanks to central banks, assets like bonds have been bid up to very high levels. Higher demand for bonds in general makes it easier for Digicel to refinance its bonds. The following chart shows how Digicel’s bonds have done since 2020.

The second thing is that the underlying Digicel business has had a good year. That comes after a bad few years, in which people spent less money on voice calls. But new revenue streams have started to compensate, like equipment and handheld sales and direct to consumer home entertainment. 

A third point is foreign exchange. Digicel owes in US dollars, but it earns in Haitian gourdes, Jamaican dollars and Paupa New Guinean kina, among others. Emerging market currencies such as these tend to be volatile, and in recent years, they have moved against the dollar. But in the last year, the Haitian gourde, in particular, has appreciated against the dollar. 

And Digicel still has levers to pull. There are reports of Chinese and Australian companies circling its south Pacific assets. In Papua New Guinea in particular, Digicel has a lucrative business, with 91 per cent market share. The south Pacific throws off $230 million in Ebitda. To make a dent in the company’s debt burden, it would need to get more than about $1.6 billion from any sale. Equivalent telecoms businesses have gone for between seven and ten times Ebitda, so $1.6 billion looks achievable – if buyers are interested.

Up to now Digicel has taken a hard-line attitude toward its creditors, going through multiple restructurings. The strategy has worked so far. Creditors have swallowed big haircuts and extensions on the money they’re owed, and O’Brien has held onto his 99 per cent stake. 

But there’s a limit to how many times this strategy can be employed. In the 2015 to 2019 period, the Digicel’s creditors tended to be “plain vanilla” credit investors, i.e. not distressed debt or emerging market specialists. Perhaps they didn’t understand what they were getting into. With every round of restructuring, the creditor based has shifted towards tougher distressed credit investors who are less easy to push around. Sul Ahmed of Fitch, a ratings agency, says: 

“If you rewind three years before they launched the first restructuring, they had a different investor base. When you restructure, you get a different restructure base. And when it comes to distressed matters, that means the odds of litigation increase considerably. As that investor base shifts to sharp-elbowed people, at some point the costs of defaults will exceed the benefits.”

Ahmed says ultimately, Digicel is going to need to borrow money from these same investors. So some amount of trust is required:

“If this is a viable business model, at some point it’ll need to refinance its debt. Its got this big maturity wall coming up in 2025. When you have a company with a couple of billion dollars coming up in the next five years, it stands to reason that at some point it’ll need its creditors to be partners in the business. You can’t treat them in hostile way, or else they’ll revolt.“

Getting debt levels back under control will go a long way towards building trust with creditors, Ahmed says:

“If the company can grow organically and get [the net debt to Ebitda ratio] down to 5.5, maybe 5, it starts to look like a different company. Management needs to move their focus from restructuring, and financial manoeuvring, to the bread and butter of growing business to business sales, growing business to consumer sales, getting more subscription customers, fewer pre-pay customers. And if they can do that, this looks like a more solid company.”