Debt restructuring and expectations of improved revenue have led Fitch Ratings to affirm Digicel Group Holdings Limited’s (DGHL) Long-Term (LT) Issuer Default Rating (IDR) at ‘CCC’.

Fitch also upgraded Digicel Limited’s (DL) LT IDR to ‘B-‘/Stable from ‘CCC’ and Digicel International Finance Limited’s (DIFL) LT IDR to ‘B-‘/Stable from ‘CCC+’.

Simultaneously, Fitch upgraded DL’s unsecured notes to ‘B-‘/’RR4’ from ‘CCC-‘/’RR5’ and DIFL’s secured term loan and notes, unsecured notes and subordinated notes to ‘B-‘/’RR4’ from ‘CCC+’/’RR4’.

Fitch said in its ratings release, “The upgrades of DGHL’s subsidiaries reflect the improvements to Digicel’s financial structure and flexibility following the reorganisation and restructuring of the company’s debt during 2020.”

It asserted, DGHL’s consolidated credit profile is consistent with a ‘CCC’ category issuer, as leverage ratios remain high and economic conditions in the company’s main operating environments remain challenged. Corporate governance concerns remain a constraint upon the ratings.

Improved ratings for subsidiaries were driven by last year’s restructuring which extended Digicel’s amortisation profile, reduced debt by USD1.5 billion, and significantly lowered annual cash interest payments to USD300 million-USD350 million per year in FY2021 and FY2022.

The US$187 million in litigation proceeds in 2H20 was also credit positive and should allow Digicel to maintain cash balances of around US$400 million on a consolidated level Fitch said.

The ratings service said, “Digicel does not face a significant maturity until the US$925 million unsecured DL notes mature in March 2023. Refinancing risk for these notes will remain high absent a return to growth in the Caribbean.”

Fitch stated that Digicel’s underlying performance has improved somewhat: and that it expects revenues to grow to US$2.4 billion from US$2.2 billion over the rating horizon.

It was observed, “Rebounding tourism should benefit the economic environments in Digicel’s markets.”

Over the last few years, Digicel’s revenues have been under pressure due to currency depreciation in its markets and declining mobile voice that have outweighed gains elsewhere. Fitch said that as declining mobile voice accounts for a smaller proportion of revenues, the secular decline there will matter less for the company’s results.

Meanwhile, Digicel is diversifying into higher growth B2B solutions and home entertainment (B2C broadband and TV); although these account for only 20 per cent of revenues at present, Fitch observed.

Fitch also noted that the company’s financial structure has improved, with Digicel’s debt restructuring cutting consolidated gross debt by approximately USD1.5 billion from USD7.0 billion to USD5.4 billion.

As a result, total debt/EBITDA declined from >7.5x to 5.9x. Fitch forecasts that consolidated leverage will stabilize around 6.0x-6.5x.

Fitch says it does not expect Digicel to deleverage significantly, as EBITDA generation of around USD900 million grows modestly and payment-in-kind (PIK) interest accrues for the DGHL notes due in 2024.

A sale of the company’s Pacific assets is not factored in the base case, but Fitch said it would be a positive for the company’s credit profile if a successful sale enabled the company to pay down DGHL debt and reduce the associated interest expense.

Fitch has de-emphasised the importance of strength of the linkages within the group, due to Digicel’s legal manoeuvering, aggressive corporate governance, and the uncertainties surrounding cross-border insolvency in the countries of operation.