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    December 13

  • 03:11 PM

Caution on Digicel bonds

SHAWN CUMBERBATCH, shawncumberbatch@nationnews.com

Added 10 February 2017

digicel-bebt-020617

DIGICEL, A MAJOR communications service provider in Barbados and the Caribbean, is facing fresh concerns about its financial performance.

Two months ago, the company dismissed suggestions from Michael Chakardijan, an analyst with research firm CreditSights that it was hemmed in by US$6 billion in debt.

In response, the company’s head of group public relations Antonia Graham said: “Digicel fundamentally disagrees with the conclusions of the report. Digicel’s outlook remains positive with robust plans to deliver by monetising our network investment and through realistic cost management initiatives.”

BARBADOS BUSINESS AUTHORITY has learnt that regional investment firm Jamaica Money Market Brokers (JMMB) is advising investors to reduce their exposure to Digicel’s bonds.

Last Tuesday, JMMB investment research and quantitative analyst Arlon Morrison released an analysis on Digicel Group Limited and said “Digicel continues to be recommended as ‘underweight’ and is suitable for investors with a high risk tolerance and who are also comfortable with the likely volatility in security prices”.

JMMB’s assigning of an “underweight” recommendation meant that it was advising investors to “reduce exposure in your portfolio to less than five per cent for this particular asset”.

Morrison said: “With an interest coverage ratio in excess of 1.3x and a current ratio just above 0.8x, it appears as though Digicel should be able to meet its obligations.

However, erratic profitability due to stagnant growth and weakening local currency revenues and a large debt burden remain causes for concern.”

Given stiff competition and the fast pace of innovation in Digicel’s business lines, constant capex (captial expenditure) is required and will continue to put pressure on cash flows which will require greater leverage if funding is not generated at a sufficient level internally.”

The analyst said JMMB’s outlook “has not altered since our July 2016 report in which we noted that Digicel’s mobile subscriber growth has stagnated while the cable TV, broadband and fixed lines of business are not growing at a fast enough rate to offset foreign exchange translation losses”.

Looking at the performance of the Digicel 8.225 2020 bonds, Morrison said: “In the past month, the yield has contracted 5.6 per cent to 12.02 per cent and for the year, the yield has contracted 15.6 per cent from 14.25 per cent.

“The spread between the 2020’s yield and the risk free rate, the interpolated US Treasuries Curve, has also narrowed over the past year. As at January 19, 2017, the 2020 bond was trading 1 034 basis points above the risk free rate, down from a spread of 1 281 basis points a year prior.”

Morrison concluded that this could be “could be interpreted as improving confidence in Digicel’s ability to service its debt or greater willingness to take risk by investors as they seek out higher yields in a low interest rate global environment”.

The JMMB report said Digicel reported revenues of US$637.9 million for the three months ended September 30, 2016, a seven per cent decline over 2015.

This was attributed mainly to depreciation of local currencies against the US dollar (Haiti, Papua New Guinea, Suriname, Jamaica and Trinidad and Tobago). (SC)

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