Billionaire O'Brien Risks Investor Ire After Debt Yields Surge

(Bloomberg) -- For bondholders in Irish billionaire Denis O’Brien’s cell-phone empire, it’s been a roller coaster few months. Now, they’re looking for reassurance that the rough ride is almost over.

Within the next month, Digicel Group Ltd. executives will brief investors worldwide, introducing them to its new management and beginning to lay the ground for an eventual $2 billion refinancing of a bond maturing in 2020, according to a person familiar with the matter. The so-called “non-deal roadshow” comes after the 2020 yield rose as high as 15.4 percent from 8.5 percent -- making it the worst emerging markets performer this year.

Billionaire O'Brien Risks Investor Ire After Debt Yields Surge

“What needs to happen is for the company to come out now with something positive,” said Till Moewes, an analyst at Schroder Investment Management, which holds a share of the debt. “They need to produce some new positive news to stop this negative chain reaction.”

Digicel has a history of refinancing early, and some investors might have hoped the company would move to redeem the 2020 bond this year. While no final decision has been taken, that probably won’t happen anytime soon should yields remain close to their current level, even after a recent dip, according to the person familiar, who asked not to be identified as deliberations are continuing.

O’Brien built his cell-phone empire, which stretches from Haiti to Papua New Guinea, on high-risk, high-yield debt. Since 2001, Digicel has accumulated about $6.5 billion of borrowings, mostly to build out networks across 31 regions. More than two years after the company shelved a planned share sale in New York that was in part designed to pay down debt, and with recent earnings disappointing investors, bondholders want a positive catalyst. Digicel faces a $1.3 billion maturity in 2021, as well as the 2020 payment.

“We expect Digicel to address that with anticipation,” said Marie Fischer-Sabatie, an analyst at Moody’s Investors Service. “If the company doesn’t make material progress in 2018 and does not start to address the issue by the middle of this year, then we could start to see some pressure on ratings.”

Widening Spread

The extra yield, or spread, over Treasuries investors demand on Digicel’s 2020 bonds has widened by 358 basis points, or 3.58 percentage points this year, while emerging-market bond spreads widened 13 basis points. The drop in its bonds pushed the spread above 1,000 basis points, or 10 percentage points.

O’Brien turned to building his business outside Ireland, after making his fortune by selling Dublin-based Esat Telecom Group Plc to London-based BT Group Plc in 2001. Worth about $4.3 billion, O’Brien still has Irish interests -- he’s the biggest shareholder in Independent News & Media Plc, one of the nation’s biggest media groups, which is facing its own battles.

Data-Breach Woes

Ireland’s corporate watchdog next week will ask a court to appoint inspectors to investigate the company’s affairs. The probe relates to an alleged 2014 data breach, with e-mails and other digital files provided to an outside firm at the behest of the company’s then Chairman Leslie Buckley, INM said on Wednesday.

The company said it had understood the data was to be trawled for details of a “particular long-term contract for professional services.” However, it may have been “searched more extensively and for a different purpose,” INM said.

Journalists and executives at the company, as well as lawyers, were among those identified as “persons of interest” during the trawl, the Irish Independent has reported, citing court documents. Buckley, vice-chairman of Digicel, said he’ll “robustly defend my position against each and every allegation.” He stepped down as INM chairman last month.

Falling Revenue

Back at Digicel, momentum has stalled. Underlying revenue in its fiscal third-quarter dropped about 3 percent from the year-earlier period to about $580 million, according to a person familiar. Adjusted earnings before interest, taxes, depreciation and amortization were about $246 million, down around 3 percent.

A number of issues were at play, according to the person. Among these were:

  • Delays in signing some corporate contracts
  • New incentives to drive data use, which hurt short-term earnings
  • Persistent weakness in Papua New Guinea’s economy, a key market for the company

Digicel, which declined to comment for this article, faces no immediate pressure, as its next big bond maturity is over two years away and it has pushed out its timetable to reduce borrowings, which amount to about 6.5 times earnings.

Progress is needed, said Moody’s Fischer-Sabatie, who described Digicel’s debt level as “high” for its B2 rating. O’Brien laid out plans last year to dismiss 1,500 workers, and appointed Alexander Matuschka as chief executive.

“We still anticipate that Digicel will see some growth in Ebitda over the next 12 to 18 months, in particular because the company will see the benefits of its transformation program,” said Fischer-Sabatie. “So we expect a gradual reduction in leverage.”

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