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Fitch Affirms Digicel's Ratings at 'B'; Outlook Stable
[May 21, 2015]

Fitch Affirms Digicel's Ratings at 'B'; Outlook Stable


Fitch Ratings has affirmed the ratings of Digicel (News - Alert) Group Limited (DGL) and its subsidiaries Digicel Limited (DL) and Digicel International Finance Limited (DIFL), collectively referred to as 'Digicel' as follows.

DGL

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

--USD 2.5 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 250 million 7% senior notes due 2020 at 'B/RR4';

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

--USD 925 million 6.75% senior notes due 2023 at 'B/RR4';

DIFL

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

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

The Rating Outlook is Stable.

KEY RATING DRIVERS

Digicel's ratings reflect its well-diversified geographical operation with leading market positions, strong network quality, and brand recognition, which have and will continue to enable stable performance and cash flow generation. The ratings are tempered by the company's aggressive shareholder distributions, high leverage, and the business concentration in countries with low ratings.

Under Fitch's approach to rating entities within a corporate group structure, the IDRs of DGL and its subsidiaries, 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 DIFL's debt 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:

Digicel has generated stable operating results in the first nine months of fiscal 2015 (FY2015), ending on March 31, 2015, and Fitch expects this trend to continue over the medium term. During the period, the company's constant-currency-based revenue posted stable growth of 5% with a solid EBITDA margin of 41.4%, which was a modest decline from 42.8% a year ago. (Fitch's EBITDA calculation includes staff costs related to share options.) This was mainly driven by increasing data revenue supporting average revenue per user (ARPU), and steady growth in Papua New Guinea (PNG), Trinidad & Tobago, and the Other Markets segment. Stable subscriber base expansion continued, with the total subscriber base reaching 13.8 million as of December 2014 from 13.4 million a year ago. Although revenue growth as reported in USD 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.

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, 2014 (3Q14), the local-currency-based revenue in PNG grew by 15% on a year-on-year basis, mainly supported by mobile data and business solutions revenues. In addition, Fitch forecasts a steady expansion of the subscriber base in the country, which grew by 7% compared to Dec. 31, 2013, as penetration rates are still low at only 43%. During 3Q14, PNG accounted for 17.7% of the total service revenue, based on the USD, which was the largest among the group companies.

Positive Revenue Diversification:

Ongoing revenue diversification away from the traditional mobile voice is positive. The contribution from data-based value-added services (VAS) should continue to steadily increase over the medium term, mitigating negative pressures on the voice ARPU, which has suffered from a high level of competition and reduced mobile termination rates in some markets. For the quarter ended December 2014, non-SM data VAS revenues grew by 21% from a year ago, accounting for 19.2% of mobile service revenues, compared to 15.8% in the previous year. Increasing smartphone penetration, which rose to 31% from 20% during the same period, should continue to support this trend.



Digicel has also gradually increased its presence in cable TV and broadband segments through the acquisition of regional operators in the past couple of years as part of its diversification strategy. The company has also acquired submarine fiber assets in 2014 to increase data capacity to support the cable business solutions segment. This segment grew strongly by 55% to USD32 million during the quarter ended December 2014 versus a year ago. Revenue contribution from these services is yet to be significant as it represented only 6.4% of the consolidated service revenue in the quarter, but these segments are likely to become a meaningful cash generator over the long term, as the demand outlook is solid.

Negative FCF:


Fitch forecasts Digicel's negative free cash flow (FCF) generation to continue until FY2016 due to high capex, despite stable performance. Also, aggressive dividend payment has been a negative credit concern weighing on the company's financial profile. During FY2015, the company's annual capex is forecast to have peaked at about USD650 million, from USD552 million in FY2014, as a result of network expansion and upgrades, including cable networks as well as a tower project in Myanmar. Capex is likely to decline to USD500 million in FY2016 and further towards USD400 million in FY2017 as expansionary projects are largely completed. FY2014 dividend payment was high at USD690 million, mainly due to the special dividend payment of USD650 million. Fitch's base-case projection incorporates the annual dividend payment of USD40 million over the medium term based on the company's guidance. In the absence of sizable dividends, Fitch expects FCF to turn positive from FY2017.

Stable Leverage:

Digicel's financial leverage should remain commensurate with the rating level over the medium term albeit with modest deterioration. Despite forecast negative FCF and some pending investments, its cash balance of USD512 million at December 2014 should cover any shortfall in cash flow from operations without a significant need for external financing. Therefore, any material increase in the company's gross debt level, which was USD6.4 billion at December 2014, is unlikely. Fitch forecasts Digicel's net-debt-to-EBITDA to remain in the range of 5.0x-5.5x over the medium term, which compares to 4.7x at end-FY2014.

Sound Liquidity:

Digicel's liquidity profile has substantially improved with the extension of debt maturities of DIFL's USD857 million facility loans during June 2014. These loans were originally due during FY2015-FY2017. Following the extension, the company faces no significant debt maturities until FY2018 when the USD202 million portion of the facility becomes due. Also, during March 2015, DL successfully refinanced its USD800 million in notes, which was originally due 2017.

Key Assumptions

--Low-single-digit annual revenue growth in FY2016 and FY2017;

--EBITDA margin to fall towards 40% over the medium- to long-term;

--Neutral-to-negative FCF generation until FY2016 due to high capex;

--Annual dividend payment to remain at USD40 million over the medium term;

--Net leverage to remain in the range of 5.0x-5.5x over the medium term.

Rating Sensitivities

A negative rating action could be considered if consolidated leverage at DGL increases above 6.0x on a sustained basis, due to a combination of competitive pressures, high capex, sizable acquisitions, and aggressive shareholder distributions.

While refinancing risk was substantially reduced with the recent note issuances and credit facility debt maturity extension, an inability to refinance in advance of sizeable bullet maturities in the medium- to long-term could also pressure its credit quality.

Conversely, a positive rating action could be considered in the 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' (May 28, 2014)

--'Telecommunications - Ratings Navigator Companion' (November 17, 2014)

Applicable Criteria and Related Research:

Telecommunications: Ratings Navigator Companion

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809869

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985134

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