Businessman Denis O’Brien’s Digicel has seen a slide recently in the market value of $925 million (€880 million) of its bonds that fall due in almost eight months’ time, amid mounting concerns about the telecom group’s ability to refinance the debt.
The March 2023 bonds have fallen to 72c on the dollar as of Monday from a near-par value of more than 98c in January, as investors fret over Digicel’s exposure to emerging markets and currencies in a weakening global economy as well as mounting turmoil in the group’s traditional funding source, the US junk bond markets.
Fitch, one of the world’s leading credit ratings agencies, said in a note in recent days that Digicel, with operations across more than 30 markets in the Caribbean and Pacific regions, “faces significant refinancing risk” with the 2023 bonds. The comments were in a publication that focused on Cable & Wireless Communications, Digicel’s main competitor in a number of markets.
Investors in the $925 million of 2023 bonds refused two years ago to take part in a wider debt restructuring that saw investors holding $7 billion of Digicel debt write off $1.6 billion of what they were owed. Bondholders that participated in the transaction at the time feared that they otherwise stood to lose much more in the event that the then-overindebted business was forced into liquidation, following years of declining earnings.
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Digicel agreed late last year to sell its Pacific unit, the least indebted part of the group, for $1.6 billion upfront to Melbourne-based telecoms company Telstra, with a further $250 million consideration subject to the business meeting certain earnings targets in the coming years.
While the proceeds have been largely ring-fenced to pay down Digicel borrowings, the deal has run into difficulties, with the company targeted by a $100 million tax bill in Papua New Guinea (PNG), the Pacific unit’s main market.
“Digicel is seeking to overturn, through both legal and diplomatic channels, an unprecedented $100 million tax levied on it, without warning, by the PNG authorities,” a spokesman for Digicel said on Monday. “Following constructive engagement the PNG authorities have recently agreed to enter into a process that it is hoped will help resolve the matter.”
The spokesman said that reports in the Australian press last month that Digicel had sought to have the Australian government, which is providing much of the funding for the Telstra deal, to pay the tax were “baseless and untrue”.
The latest Fitch comments come less than two months after the firm downgraded its view on Digicel’s creditworthiness by one level to CCC+, a very risky rating that is seven rungs deep into what is considered non-investment grade, or junk status.
Fitch said at the time that even if Digicel used proceeds from the Telstra deal to pay off a third of the $925 million of March 2023 debt, its ability to successfully refinance the balance of the debt before it falls due without some form of debt restructuring was “uncertain due to deteriorating macroeconomic conditions, rising interest rates and a decrease in risk appetite”.
Investors have pulled more than $35 billion out of funds invested in lower-quality, US high-yield bonds so far this year, according to financial data provider EPFR, amid growing fears about how financially weak companies will cope amid mounting fears about a global economic downturn. The S&P US High Yield Corporate Bond Index has delivered a negative return of minus 13 per cent so far this year, even as interest income propped up the overall performance as bond values fell.
