Digicel’s top-ranked bonds have soared to above 93 cents in the dollar since a deal was announced that will see Denis O’Brien hand majority control of the Caribbean telecoms group to bondholders.
The price of more junior and unsecured bonds has barely moved, however. That is an indication the market is convinced the better secured debt will largely escape major so-called haircuts or upfront losses as the business moves to cancel $1.8bn (€1.7bn) of debt.
The price of junior bonds has barely moved, however, with some trading as low as 25 cents in the dollar since the debt deal was announced suggesting the axe will fall heavily there.
A slice of Digicel’s so-called first lien or highest-ranked debt was priced at 93.43 cents in the dollar yesterday up from 87 cents before a deal with bondholders was announced on Wednesday. Lower-ranked senior unsecured bonds rose from 52 cents to 63 cents in the dollar while junior debt due to be repaid in 2025 was little changed at 25 cent in the dollar, according to data provider Bloomberg.
Even junior debt is formally ranked above shareholders within any capital structure. With a commitment already in place for Mr O’Brien to retain a stake in the business post restructuring and some bonds underwater, it sets the scene for a potentially divisive next round of negotiations.
Holders of Digicel bonds include a number of US hedge funds and investment funds, including GoldenTree Asset Management, PGIM Fixed Income Contrarian Capital Management, according to a report by Bloomberg.
All sides are under pressure to make progress towards a comprehensive and consensual debt deal within a 30-day grace period due to run out at the end of March. Failure to make progress would trigger immediate demands for repayment of bonds based on their due date rather than seniority, potentially upending the effort to lock in an agreement..
That is a strong incentive for a consensual outcome, but there is a risk holdouts will look to maximise their recoveries by leveraging the ticking clock.
The debt deal announced on Wednesday was backed by Mr O’Brien as well as holders of more than 50pc of the company’s €4.45bn of debt. It includes agreement in principle for a comprehensive overhaul of the company’s finances, including slashing debt by $1.8bn and handing majority ownership of the business to bondholders.
The move would cut Digicel’s annual interest bill by around $110m allowing it much greater flexibility to invest in its operations and making the business more sustainable in the long run.
However, while supporters of the plan hold a majority of all of Digicel bonds, that is not even across the capital structure.
Their stakes range from 78pc of one highly ranked slice of the debt to just 35pc of another bond layer.
Bond market documentation typically allows for majority decisions to be binding within classes of bondholders, making restructuring bond debt relatively easier than renegotiating debt held by different banks. However, classes of bondholder can hold out against a debt write-down, potentially forcing expensive and slow court-run alternatives.