Digicel Bond Analysis

Bond Analysis: Digicel Group Limited VMWM Research and Stockbroking | April 09, 2020

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DIGICEL DLLTD DLLTD DLLTD DLLTD DLLTD DLLTD DLLTD GROUP 2023 2021 2020 2022 2022 2022 2024 JAMAICA LIMITED Issuer Digicel Digicel Digicel Digicel Digicel Digicel Digicel Ltd. Ltd. Group Group Group Group Group Two Ltd. One Ltd. Two Ltd. Ltd. Ltd.

Industry Wireless Wireless Wireless Wireless Wireless Wireless Wireless Telecom Telecom Telecom Telecom Telecom Telecom Telecom

Risk HIGH HIGH HIGH HIGH HIGH HIGH HIGH Classification Recommendation:

DGL 1 Notes Country of Bermuda Bermuda Bermuda Bermuda Bermuda Bermuda Bermuda - EXCHANGE Incorporation DGL 2 Notes- DO NOT EXCHANGE Coupon Rate 6.75% 6% 8.25% 8.25% 8.25% 7.125% 9.125% DGL 2 2024 Notes- DO NOT EXCHANGE DL 2021 Notes- DO NOT EXCHANGE Outstanding 925,000 1,300,00 0 62,851 1,000,000 937,149 21,004 993,015.77

DL 2023 Notes- EXCHANGE Amount (000) ABOUT THE COMPANY Price $64.434 $79.332 $68.650 $65.616 $24.740 $11.440 $15.970 Digicel Group Ltd. is a telecommunication service provider incorporated in Bermuda, with offerings in mobile telephone, business solutions, fixed broadband, pay-TV and other related Yield to 24.232% 28.758% 87.207% 25.950% 82.815% 164.695% 77.693% products and services in the Caribbean, South Pacific and Maturity Central America. Digicel’s operations began with its entry into the Jamaican mobile telecommunications market in 2001, where it became the market leader in less than two years. Payment Interest Interest is Interest Interest is Interest Interest is Interest is Dates is paid in paid in is paid in paid in is paid in paid in paid in Digicel Limited (DL) is a holding company controlling the March & April & March & March & March & April & April & Oct operating companies of the Digicel Group. Digicel Group Sept Oct Sept Sept Sept Oct Limited (DGL) is the parent company for DL and was established Maturity March April Sep Dec Sept April April in 2001. DGL currently has over 13.5 million customers across Date 2023 2021 2020 2022 2022 2022 2024 its 32 markets in the Caribbean, Central America and Asian Pacific. Its main markets in terms of revenue generation are Ra tings: Jamaica, Haiti and Trinidad & Tobago. It is renowned for Moody’s Caa2 Caa2 Ca Caa Ca Ca NA delivering the best value and service on the best network. Fitch CCC CCC C CCC C C C

Digicel holds the top market position in wireless telecommunications in 22 of its 31 markets. Over the last Outlook Despite Digicel exhibiting its commitment to restructure its debt in efforts to reduce several years, Digicel has expanded its service offering and is leverage and financial costs through its new debt exchange offer, we still maintain a negative outlook for Digicel Group Limited and its subsidiaries as we anticipate that undertaking a business transformation project (Digicel 2030) aimed at reducing operating expenses by centralizing common revenues will continue to trend downwards due lower demands for voice and SMS messaging from telecom providers. Also, the expected outturn in growth in the telecom support functions & reducing management layers. industry on a global scale is just around 2%. As the demand for faster and better quality Digicel International Finance Company is a debt issuing increased the subject of 5G technology comes to the forefront. However, the feasible of the implementation of this technology by telecom providers may not be feasible as the company that operates as a subsidiary of Digicel Group Limited towers are costly and will require large amounts of capital. It is also anticipated that the and is based in St. Lucia. company may experience a decline in revenues as more people are forced to stay home due to the COVID pandemic and are using WIFI instea 1d of mobile data.

Bond Analysis: Digicel Group Limited

VMWM Research and Stockbroking | April 09, 2020

OVERVIEW OF NEW DEBT EXCHANGE OFFER

In efforts to curtail the company’s current high leveraged position, Digicel has chosen to tender an offer to exchange its outstanding debt. This offer will allow the company to extend the date of its near-term maturities, reduce its overall debt and reduce its interest expense. The offer will see existing DGL 2 2022 notes, DGL 2 2024 notes, DGL 1 notes being exchanged for “New DGL0.5 notes” whilst existing DL 2021 notes and DL 2023 notes will be exchanged for New DIFL and New DL notes respectively. These adjustments in capital will see the company reducing its outstanding debt from US$7.0 billion to around US$5.3 billion or by $1.7 billion dollars once the offer receives full participation. The interest payments due in March (DGL 1 &2 DGL2 2022) and April (DGL 2 2024) will be deferred as the company elected to take advantage of a 30-day grace period permitted under its indentures. The adjustment is also anticipated to reduce its annual interest cost by around US$130 million. The expiration date has been extended from April 8, 2020 at 5:00pm (NYC Time) to April 28, 2020 at 11:69pm (NYC Time) to facilitate the addition of US$100 million of borrowings under DIFL’s senior credit facility.

Existing Notes Existing Principal Exchange Ratio ProForma Notes Offer Principal Amount ($ Amount ($ millions) millions) DGL 1 Notes 1,000 94% New DGL 0.5 8.0%/2% PIK Secured 941 2024 Notes DGL 2 Notes 937 37% New DGL 0.5 5.0%/3.0% PIK 300 Unsecured 2025 Notes New DGL 0.5 7.0% PIK Convertible 50 Notes Sub-Total 350 DGL 2 2024 Notes 984 25% New DGL 0.5 5.0%/ 3.0% PIK 100 Unsecured 2025 Notes New DGL 0.5 7.0% PIK Convertible 150 Notes Sub-Total 250 DL 2021 Notes 1,300 92% New Incremental DIFL 8.75% 627 Secured 2024 Notes New DIFL 6.0%/7.0% PIK 317 Unsecured 2025 Notes New DIFL 8.0% Subordinated 2026 256 Notes Sub-Total 1200 DL 2023 Notes 925 85% New 8.0% DL 2027 Notes 786

Bond Analysis: Digicel Group Limited

VMWM Research and Stockbroking | April 09, 2020

FINANCIAL PERFOMANCE & PROJECTIONS

(USD ‘000) 2015 2016 2017 2018 2019 Revenues 2,794,110 2,676,656 2,505,029 2,415,920 2,302,212 Operating Costs & Expenses -2,086,304 -1,978,776 -1,900,860 -1,961,780 -1,823,233 Net Income -157,545 -30,246 -36,939 -219,516 -288,186 EBITDA 1,113,083 1,121,830 1,032,461 959,860 961,714 EBITDA Margin (%) 39.84% 41.91% 41.22% 39.73% 41.77%

9 Months Variance 9 Months Ended Dec 31 Ended Dec 2018 31, 2019 Revenue 1,725,269 -1% 1,712,603 Operating Profit 438,220 -17% 365,410 Net Loss -41,376 416% -213.699 Taxation -67,150 26% -84,754 Total Assets 4,287,806 -1% 4,260,539 Cash 96,434 96,434 125,921 Total Liabilities 7,950,322 7% 8,493,558 Free Cash Flow 355,740 31% 465,181 Total Equity -3,662,516 16% -4,233,019

FOR THE 9 MONTHS ENDED DECEMBER 31, 2019:

Over the 9-month period ending December 31, 2019 the company’s Revenue decreased marginally by 1% from US$1.725 billion to US$1.712 billion. This decrease was mainly attributed to a 9% decline in revenues from Voice, partially offset by a 6% uptick in revenues from Data which was impacted by a decline in Total Subscribers. From a geographic perspective, revenues fell in Haiti, French West Indies and El Salvador by 14%, 8% and 13% respectively while revenues increased in Jamaica, Trinidad & Tobago, Papua New Guinea and Other Markets by 3%, 5%,4% and 1% respectively. Cost of sales was reduced from US$421.47 million to US$390.67 million or by 7%. This decrease was largely driven by a 5% decline in direct costs associated with the benefits of FX depreciation. Operating Expenses increased from US$865.57 million to US$956.51 million or by 11%. The company benefited from non-recurring insurance proceeds associated with damages from hurricanes Irma and Maria in the prior year. With the adoption of IRS 16, this had a favourable impact on the company’s operating expenses as operating expense would have been around US$30 million higher in the prior year. Net Loss increased from US$41.37 million to US$213.69 million or by 416%. This increase was mainly driven by a US81.66 million-dollar loss from associates; namely Digicel Holdings (DHCAL) which is the holding company of Digicel Panama.

Bond Analysis: Digicel Group Limited

VMWM Research and Stockbroking | April 09, 2020

FOR THE 9 MONTHS ENDED DECEMBER 31, 2019 CONT’D:

Total Assets fell marginally from US$4.28billion to US$4.26billion or by 1% which was largely due to a 18% decline in accounts receivable and prepayments. Total Liabilities increased from US$7.95 billion to US$ 8.4 billion or by 7% which was mainly due to increases in long-term debt primarily reflecting a US$255million increase in DIFL long term debt following the issuance of the DIFL US$600m Senior Secured Bond coupled with a subsequent repayment of the DILF revolving credit and the Term Loan A facility.

Revenues by Market

16%

35%

12%

15% 6% 3%

Jamaica Haiti Trinidad & Tobago French West Indies El Salvador Papua New Guinea Other Markets

Key Metrics 2020P 2021P 2022P 2023P 2024P Expected Free Cash Flow 399,167 452,736 424,370 396,957 370,461

Expected Shareholders Equity (4,412,922) (4,541,022) (4,696,552) (4,878,593) (5,086,255)

Expected EBITDA Margin 37.72% 39.08% 38.38% 37.66% 36.92% Expected Debt to Equity (x) -1.87 -1.82 -1.76 -1.69 -1.62 Expected Interest Coverage (using 1.064 1.206 1.131 1.058 0.987 FCF) (x) Expected Interest Coverage (using 0.988 1.051 1.017 0.985 0.954 EBIT) (x)

Bond Analysis: Digicel Group Limited

VMWM Research and Stockbroking | April 09, 2020

Revenues

3,000,000 2,500,000

2,000,000

1,500,000

USD'000 1,000,000

500,000

0 2015A 2016A 2017A 2018A 2019A 2020P 2021P 2022P

Net Income 0

-50,000

-100,000

-150,000

USD'00 -200,000

-250,000

-300,000

-350,000 2015A 2016A 2017A 2018A 2019A 2020P 2021P 2022P

EBITDA 1,200,000

1,000,000

800,000

600,000

400,000

200,000

Bond Analysis: Digicel Group Limited

VMWM Research and Stockbroking | April 09, 2020

USD (Millions) EBITDA EBITDA Total Total Interest Debt/Equity Current Free Total Margin Debt Equity Coverage Ratio Cash Debt to (EBIT) Flow EBIDTA HKT Capital No 5 Ltd 30.08% 11,891 80,923 17,972 2.86 4.50 1.28 3,359 6.81 Comunicaciones 38.88% 1,611 10,176 2,680 1.02 3.80 1.1 65 6.32 Celulares SA Via Comcel Trust CITIC Telecom 23.37% 2,376 9,069 8,895 4.69 1.02 1.42 1,115 3.82 International Finance Ltd SmarTone Finance Ltd 20.96% 1,719 4,806 5,076 9.69 0.95 1.43 914 2.80 C&W Senior Financing 32.85% 1,529 10,957 3,979 0.71 2.75 1.3 295 7.17 DAC Digicel Group Ltd. 41.79% 991 8,493 -4,233 0.78 -2. 0 0.69 465 8.56

AVERAGE 29.23% 3,825 23,186 7,720 3.79 2.60 1.31 1,150 5.38

Comparable Bonds

PCCW-HKT Capital No. 5 Limited is a special purpose vehicle which was formed with the objective of issuing debt securities to refinance indebtedness, repay existing credit facilities and for acquisitions. The company’s affiliated companies operate within the telecommunication sector in Hong Kong. Comunicaciones Celulares S.A provides wireless communication services in Guatamala City, Guatemala; the company also offers cellular services. CITIC Telecom Holdings Limited provides telecom services in the Asia Pacific. These services includes voice, mobile SMS and business solutions to ISP and telecom operators. SmarTone Telecommunications Holdings is a wireless communication provider with subsidiaries that operate in Macau and Hong Kong. It provides fixed fibre and broadband services for retail and institutional clients. C&W Senior Financing Designated Activity Company is a designated debt issuing company limited with shares incorporated under the laws of The Republic of Ireland. Its affiliated company, Cable & Wireless Communications Limited (CWC), provides cellular telecommunication products and services to customers in Latin America, the Caribbean and the Seychelles. Its primary markets include Panama, Jamaica, The Bahamas, Barbados and Trinidad and Tobago.

Digicel’s total debt to EBIDTA ratio in comparison is 8.56 times. This implies that the company is highly leveraged and may have challenges in repaying lenders their interest and principal payments and hence why they are currently trying to restructure their debt. The company has a negative debt to equity which is mainly due to a large accumulated deficit which has been caused by year over year net losses. Its current ratio is also below its peers and less than the generic benchmark of 1x, suggesting that the company may have challenges in meeting its short-term obligations. The Interest coverage is also below its one and suggests that the company is not able to service its interest expense from operating income alone.

Bond Analysis: Digicel Group Limited

VMWM Research and Stockbroking | April 09, 2020

OUTLOOK:

Impact of COVID-19 In light of the COVID-19 pandemic the company has already increased its expenses due to the procurement of masks and other COVID related supplies. The company has also purchased laptops to facilitate remote working as non- essential employees are forced to stay home. We anticipate that the company will experience declines in mobile data revenue as more people will opt to use WIFI connectivity instead of their mobile data. The implications of 5G Technology The future of fifth generation (5G) wireless technology has raised concerns among wireless telecom providers. One of the biggest concerns is that 5G operates at a much higher frequency than 4G technology and thus has a shorter coverage range than 4G which implies that more towers would be required. Therefore, 5G technology will be burdensome to cashflows as this venture will be very capital intensive. Voice App disruption In the last few years voice apps such as WhatsApp have disrupted the telecommunications landscape and has now become one of the most used applications to date. The app disrupted the SMS messaging platform of telecom companies on a global scale. As a result, telecom companies were forced to adjust their bundles by offering more data and reducing their voice packages. As technology improves over time, the lower the demand for paid voice calls and SMS messages using telecom providers. High Possibility of Default

On April 9, 2020 Moody’s Investor Services downgraded Digicel Group Limited’s probability of default from “Caa2-PD” to “Caa3PD” while simultaneously downgrading the company’s senior secured rating if DIFL from “B3” to “Caa1”; all other ratings within the group remained unchanged while the outlook is negative. The rationale for the PDR downgrade was the recognition that the company is more likely to default in the short-term either through non-payment of interests related to DGL1 and DGL2 notes which were due on March 30 and April respectively of this year. DIFL’s downgrade was due to Digicel’s tight liquidity situation and increased risk of default. On April 3, 2020 Fitch Ratings Agency downgraded Digicel Limited (DL) from a “CCC” to a “C” and its outstanding notes (2021 & 2023) from “CCC”/”RR4” to “C”/”RR4”. Also, the Agency downgraded DIFL from “B-“/Negative to “CCC+” and its outstanding notes (2024 and 2025) from “B-“/”RR4” to “CCC+”/”RR4”. Fitch considers Digicel’s proposed restructuring as a distressed debt exchange for DL, DGL1 &2 notes due to the company’s unsustainable capital structure and limited financial flexibility.

Bond Analysis: Digicel Group Limited

VMWM Research and Stockbroking | April 09, 2020

Implications of the debt exchange and potential losses to bondholders

The current debt exchange proposed by Digicel is intended to have its maturities extended over a longer time horizon. Although the horizon is expected to be extended and allow for more interest payments over a longer period of time, a rational investor would want to be compensated for a higher degree of risk due to uncertainties surrounding not only the company but the Global Economy on a whole due to the COVID-19 pandemic; a reduction in coupon rates is therefore not an attractive offer at this time. Existing notes such as the DGL2 2022 which pays 8.25% will be exchanged for DGL 0.5 2025 with a coupon of 5% which means bondholders would be getting roughly 3% less in coupon payments on a per annum basis. The exchange will also include some paid-in-kind (PIK) notes which means that bondholders will be paid in additional notes instead of cash payments. A rational investor would not want to be given additional notes in a company that has had to postpone its current interest payments to bondholders due to illiquidity. Investor confidence has fallen since Digicel recently announced that it would not be able to make its March and April payments on time. The potential for a similar situation to occur in the short to medium term is high as the company’s earnings continue to be eroded by finance costs and its revenue continues to trend downwards.

INVESTMENTS POSITIVES:

o Low concentration risk as the company operates across many jurisdictions o Digicel group is exempted from taxes until March 31, 2035 o Strong Brand awareness o Still a high demand for high speed internet and 4G data

INVESTMENT NEGATIVES

o Steady decline in revenue growth year over year o High Operating Costs and Expenses o Declining EBITDA margin year over year o Declining Subscription base o Poor Credit Agency ratings o High capital expenditure requirements year-over-year o High Total Debt to EBIDTA relative to its peers o Low current ratio relative to peers o The jurisdictions in which the company operates are susceptible to hurricanes o Uncertainty surrounding novel COVID-19 disease

Bond Analysis: Digicel Group Limited

VMWM Research and Stockbroking | April 09, 2020

CONCLUSION

In light of the company taking the decision to reduce its SOURCES debt levels by virtue of a debt exchange offer, coupled Bloomberg, The Digicel Group Annual and Quarterly Reports, with the fact its upcoming interest payments in March Moody’s Investor Services, Fitch Rating Agency. and April will be deferred by thirty (30) days and the maturity of specific notes will be extended, we still anticipate that the company’s earnings will continue to DISCLAIMER be eroded due to high operating costs coupled with This Research Paper is for information purposes only. The downward trending service revenues, the risks information stated herein may reflect the opinion and views of associated with this company is still skewed to the VM Wealth Management in relation to market conditions and does not constitute any representation or warranties in downside as further increases in subscription base are relation to investment returns and the credibility of the sources expected due to strong competitive forces within the of information relied upon in the preparation of this report, telecom space. Low levels of earnings will continue to without further research and verification. Before making any investment decision, please consult a VM Wealth Management put pressure on the company’s ability to meet short Advisor. and long-term obligations.

Once the debt exchange is successful, we anticipate that the company would be in a better cash position and be able to cover its interest payments year over year. However, we expect the company will face challenges in making payments due in 2025 as a large principal payment of around US$1.5 billion become due. As such we recommend that existing DGL 1 bondholders exchange their notes for the new DGL 0.5 8.0% 2024 Secured Notes which has an exchange ratio of 94%. We also recommend the exchange of DL 2023 notes for new 8% DL 2027 notes. We recommend that all other bondholders DO NOT EXCHANGE their existing notes. Our overarching recommendation on Digicel bonds remains UNDERWEIGHT and should constitute a small portion of your total portfolio if any.