Digicel, the mobile operator controlled by Denis O’Brien, is facing an uncertain future because of a combination of high debt, currency fluctuations and change in consumer behaviour, according to research by CreditSights.
In a report presented at a conference in London on Wednesday Michael Chakardjian, an analyst with the financial research company, said that Digicel’s debt of more than $6 billion (€5.7 billion) could prove problematic for the company.
“With leverage north of six times we view that there is limited to no equity cushion. This gives the company little wiggle room for poor performance and there is not an immaterial threat of distress in the event of poor results in key markets,” Mr Chakardjian said.
Digicel, which operates in 32 markets in the Caribbean and South Pacific, has outlined ambitious plans to try to cut its debt but Mr Chakardjian was doubtful that it would be able to succeed. A Digicel spokesman rejected the claims.
“Digicel fundamentally disagrees with the conclusions of the report. The company’s outlook remains positive with robust plans to deliver by monetising our network investment and through realistic cost management initiatives,” the spokesman said.
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Digicel is focusing on growing its earnings in order to reduce the company’s debt-to-earnings ratio while cutting costs at the same time.
The company aims to return to growth in the year to March 2018 as its extensive expenditure programme on cable and fibre begins to bear fruit.
The plan involves increasing margins by between 2 and 4 percentage points while cutting costs by using technology and changing back office functions.
Mr Chakardjian, who was speaking at the CreditSights conference in London, described these plans as opaque and highly ambitious.
“We believe management’s deleveraging plans come with substantial execution risk, which is a very important point. This is all the more important given the company’s high leverage,” he said.
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Another issue that he said could hamper the company’s ability to deliver was that the habits of Digicel’s users were changing.
The company has been suffering from a decline in phone call revenue as users switch to Whatsapp, Viber and Skype. Data usage on the company’s networks has not offset the decline in phone call revenue yet.
The currency exchange market is another issue for Digicel as it operates in a number of developing countries.
Papua New Guinea, one of its larger markets, is particularly vulnerable. It recently applied to the IMF for a loan and there is a possibility that the country may be forced to devalue its currency, which would impact on Digicel’s earnings.
The operator has two loans maturing in the near future. A $210 million (€200 million) loan is due to be repaid in March 2018 while $90 million (€86 million) in project finance debt on its South Pacific business will mature in August.
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“Digicel’s liquidity position has weakened which brings increasing concerns with the company’s near-term refinancing needs,” Mr Chakardjian said.