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Digicel: Summary Bond Terms Digicel Ltd Bonds 12%, 2014 8.25%, 2017 7%, 2020 6%, 2021

Issuer Digicel Ltd.

Parent Company Digicel Group Ltd.

Country of Risk Jamaica

Currency USD

Interest Accrual Date March 11, 2009 December 8, 2009 February 10, 2012 March 5, 2013

Tenor at Issue 5 Years 8 Years 8 Years 8 Years

Time Remaining Till Maturity

1.08 Years 4.5 Years 6.92 Years 8 Years

Duration 0.97 3.73 5.48 6.21

Maturity Date April 1, 2014 September 1, 2017 February 15, 2020 April 15, 2021

Maturity Type Make whole @ 501/ Callable on 04/04/2013 @

$106.00

Make whole @ 50 until 09/01/2013

Make whole @ 50 until 02/15/2020

Make whole @ 50 until 4/15/2016

Coupon 12% p.a. semi-annual

(April &October)

8.25% p.a. semi-annual

(March & September)

10.5% p.a. semi-annual

(April &)

6% p.a. semi-annual (March

& September)

Bond/ Issuer Rating B1 (Moody’s; Feb 2013), B (Fitch; Feb 2013)

B1 (Moody’s; Feb 2013), B (Fitch; Feb 2013)

B1 (Moody’s; Feb 2013), B (Fitch; Feb 2013)

B1 (Moody’s; Feb 2013), B (Fitch; Feb 2013)

Use of Proceeds Acquisition Financing Repay/ Refinance Debt Acquisition Financing To Refinance Digicel 12%, 2014 notes and General

Corporate Purpose

Recommendation SELL HOLD HOLD BUY

1A Make-whole call is a type of call provision in the bond which will allow Digicel to pay off the remaining debt early. Bond holders will receive a lump sum payment (will be “made whole”)

if Digicel decides to call the bond. This will be done at the price corresponding to the benchmark treasury + specified basis-points (50 basis-points).

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Digicel: Summary Bond Terms Digicel Group Ltd. 10.5%, 2018 8.25%, 2020

Issuer Digicel Group Ltd.

Parent Company n/a

Country of Risk Jamaica

Currency USD

Interest Accrual Date March 22, 2010 September 19, 2012

Tenor at Issue 8 Years 8 Years

Time Remaining Till Maturity 5.08Years 7.5 Years

Duration 3.85 5.48

Maturity Date April 15, 2018 September 30, 2020

Maturity Type Make whole @ 50 until 04/15/2014 Make whole @ 50 until 09/30/2016

Coupon 10.5% p.a semi-annual (April &

October)

8.25% p.a. semi-annual (March &

September)

Bond Rating Caa1 (Moody’s; Sept 2012), B- (Fitch;

May 2012)

Caa1 (Moody’s; Sept 2012), B- (Fitch;

May 2012)

Use of Proceeds Acquisition Financing Repay/Refinance Debt

Recommendation HOLD HOLD

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Digicel Bonds - Analysis

Parent Company (Digicel Group Ltd.)Overview

Digicel Group Limited, domiciled in Jamaica and incorporated in Bermuda is currently the largest

provider of wireless communications services in the Caribbean and South Pacific regions. The company

was launched in Jamaica in 2001 by Irish entrepreneur Denis O’Brien. The companycurrently operates a

broad scope of wireless services in 30 markets (inclusive of Samoa, Haiti, Papua New Guinea, Guyana

and others) which span approximately 31 million people. As a result, Digicel’s operations take into

account a diverse range of markets, demographics, regulatory regimes and currencies, which seek to

reduce dependence on any individual operation. Since its 2001 entry, Digicel has transformed into the

fastest growing wireless telecom operator in the Caribbean. As at June 2012, the wireless subscriber

base for Digicel worked out to be approximately 12.8 million. As it relates directly to Jamaica, since

Digicel’s inception, mobile penetration has increased from 4% (2001) to close to 100% currently, which

makes Jamaica one of the most highly mobile penetrated countries in the world.

Digicel Ltd is a subsidiary of Digicel Group Ltd which has sponsored several athletic and corporate

socially responsible initiatives from Caribbean, Central American and Pacific countries including a

number of sporting teams and events from the Special Olympics to the West Indies Cricket team. In the

Digicel group there is also Digicel Holdings (Bermuda Ltd.) and Digicel International Finance Ltd. From a

revenue perspective, Digicel’s three largest markets are Jamaica, Haiti and Papua New Guinea with

revenue contributions of 19%, 17% and 16% of total revenue respectively (as of June 2012). These

results are a realisation of the potential which the company’s chairman saw in Jamaica especially, as

Digicel took the decision to establish the company’s Caribbean headquarters in the island nation. More

recently, the company constructed a state of art office complex on the Kingston waterfront which now

houses the world headquarters for the Digicel group. Digicel’s focus is placed on making innovative

product offerings available to its subscribers in an effort to make the customer experience rewarding.

Some such innovative offerings include per-second billing, online bill viewing, rollover minutes, online

refill of prepaid cards and bill payment and data transmission & internet access via the EDGE network

and 3G technology. While continuously innovating, the company has managed to successfully foster a

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unique organizational culture fixated on innovation, entrepreneurship, client focus and corporate social

responsibility.

Country of Risk Overview

Jamaica has been characterized by negative to tremendously limited economic growth, declining

productivity levels and reduced international competitiveness, which only compounds the socio-

economic instability caused by rising unemployment and widespread crime and gang violence. A major

contributor to the setbacks in economic growth and productivity is the country’s persistent budget

deficits coupled with a high debt burden which has been at unsustainable levels for years. As a fiscal

reform condition for the Government of Jamaica to secure international assistance from the

International Monetary Fund (IMF), the National Debt Exchange (NDX) programme was launched in

February 2013 to restructure J$860 billion of marketable domestic debt of the Government of Jamaica.

As the economy remains in a state of inertia, the absence of an IMF agreement has resulted in pressure

on the local currency and on local interest rates. Despite the negative economic sentiment associated

with Jamaica, the country still has the potential for robust growth through trade opportunities and

strategic investments. With its central Caribbean location, the country is within the shipping lane to the

Panama Canal and is in relatively close proximity to large markets in the North American region and

several emerging market economies in Latin America. Jamaica also offers an abundance of foreign direct

investment opportunities in various sectors inclusive of tourism, construction, manufacturing, financial

services and information communication technology. With regards to tourism, the industry accounts for

approximately 5-8% of Gross Domestic Product and represents one of the growing sectors within the

Jamaican economy due to its direct linkage with other dominant economic activities such as agriculture,

health, sports, manufacturing and education. As a result of this, there are various sub-sectors which

show promising growth prospects especially sports tourism and medical tourism. In these areas there

are unique opportunities which the country can take advantage of in order to gain additional visibility in

international markets.

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Industry Overview: Telecommunications

The telecommunications sector in Jamaica has been significantly transformed over the past decade.

Prior to 1999, the sector was dominated by Cable & Wireless Jamaica (C&WJ) (which was rebranded as

LIME in 2008). The company was granted five exclusive licenses in 1988, for 25 years with the option

for extension for a further 25 years at the end of the period. These licenses successfully made Cable &

Wireless the sole provider of the island’s domestic and international telephone service at the time.

However, there were mounting complaints industry wide about the paltry operations and sub-standard

customer service that C&WJ was providing as the monopoly supplier of telephone service in Jamaica at

the time. The government, in response to the public outcry, coupled with an increased desire to foster a

more competitive telecommunications sector embarked on the process of deregulating the

telecommunications industry. This was done on a phased basis with the first phase being launched in

September 1999 when an agreement was reached between C&WJ and the government of Jamaica. The

phone market was opened up for competition in 2001 and the sector was fully liberalised by March 1,

2003.

In keeping with this, by April 2001, Irish entrepreneur, Denis O’Brien launched Digicel in Jamaica with

the country’s first GSM mobile service. The company anticipated reaching 100,000 customers by the end

of their first year of operations. However, it far surpassed expectations and reached this goal within a

mere 100 days of operation. Never before in the country’s history of mobile telecommunications had

such tremendous growth been seen in a network, as Digicel broke record after record on its way to

surpassing its major competitor as the mobile provider with the largest customer base in the island.

Other companies such as Mi-Phone (later acquired by Claro Jamaica) and Flow (internet and land-line)

also entered the market. In 2011, Digicel acquired the Claro Jamaica operations, leaving only two mobile

telephone players, LIME and Digicel.

In 2012, the Telecoms Act was amended to give the Office of Utilities Regulation (OUR) the right to set

mobile inter-connectivity rates. In addition, the legislation is expected to allow for number portability in

the near future which will result in more intense competition between the two market players. In the

wireless telecommunication subsector, this intense competition will result in a significant benefit for

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consumers in the form of increased mobile data transfer speeds along with personal and corporate

solutions available for online banking and mobile payments.

Digicel Group Ltd. Financial Indicators

Digicel Group Ltd. realised a 15.09% increase in net profit in 2012 over the previous year. The company

has managed to increase profit year over year after reporting a considerable loss in 2010 of $US 131.7

million which was attributed to losses and impairment charges associated with its investment in Digicel

Holdings (Central America) Ltd which is the holding company for Digicel Panama.

Digicel Group Ltd. Consolidated Balance Sheet Data

(Presented in US$000)

As at 31/03/2012 31/03/2011

Total Assets 4,662,259 4,219,283

Total Liabilities 5,808,575 5,372,874

Total Shareholders’ Equity (1,146,316) (1,153,591)

Digicel Group’s total assets have increased 10.5% over the review period to US$4,662.3 million in 2012.

Total liabilities also increased toUS$5,808.5 million, while shareholders’ equity increased marginally to

(US$1,146.3) million which is indicative of the significant amount of borrowing which the company has

undertaken.

Digicel Group Ltd. Income Statement Summary

(Presented in US$000) For the Year Ended

31/03/2012

31/03/2011 31/03/2010

Revenue 2,408,679 2,092,869 1,622,104

Cost of Sales (658,340) (567,302) (444,485)

Gross Profit 1,750,339 1,525,567 1,177,619

Other Expenses (1,703,106) (1,482,409) (1,309,298)

Net Income/ (Loss) 47,233 43,158 (131,679)

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Digicel Group Ltd. Financial Indicators (cont’d)

Digicel Group Ltd. Summary Statement of Cash Flows

(Presented in US$000)

For the Year Ended 31/03/2012 31/03/2011 31/03/2010

Net Cash Provided by Operating Activities 505,244 431,732 435,184

Net Cash Provided by/(used in) Investing Activities (669,843) (1,170,351) (410,058)

Net Cash Provided by Financing Activities 210,312 314,056 518,792

Effects of Exchange Rate Changes on Cash & Cash Equivalents (2,444) (2,950) 6,358

Increase/ (Decrease) in Cash & Cash Equivalents 43,269 (427,513) 550,276

Cash and Cash Equivalents at Start of Year 613,335 1,040,848 490,572

Cash and Cash Equivalents at the End of Year 656,604 613,335 1,040,848

Digicel has been experiencing positive cash flows from operating activities, which is primarily due to the

increase in revenues surpassing increases in cash impacting expenses. Positive operating cash flows are

seen as an indication that the company has been able to consistently generate sufficient cash flows to

maintain and grow its operations. The negative investing cash flows speak to purchases of property,

plant and equipment along with intangible assets. The decrease in investment between 2011 and 2012

is as a result of the company carrying out fewer acquisitions in 2012. Cash flows from financing activities

have gradually decreased over the period which is related to higher net repayments of debt and

dividends.

Digicel Group Ltd. Financial Ratios & Other Indicators

Ratios 2012 2011

Liquidity Current Ratio (x) 1.39 1.09

Leverage Debt/Equity (x) -5.07 -4.66

Interest Coverage (x) 1.56 1.49

Profit Return on Assets (%) 1.01 1.02

Indicators

Subscriber Base Total Subscribers (000’s) 12,825 10,055

The abovementioned specific financial ratios and indicators seek to provide further insight into the

company’s overall performance for the review period. The current ratio illustrates that Digicel is capable

of paying its short term obligations and appears to be operating fairly efficiently in its ability to turn its

products and service offerings into cash. The company’s debt/equity ratio indicates that the majority of

Prepared by: VMWM Research Department;

the company’s assets are financed through

an indicator that the group is just abou

The foundation of Digicel’s success lies in its subscriber base which has significantly grown

inception. With a 27.5% increase from 2011, the subscriber base in 2012

million. As Digicel continues to innovate in the field of wireless telecommunication services, this figure is

expected to grow exponentially year over year.

Digicel Group Ltd. Bonds

Digicel Group Ltd. bond prices have

continue in the short to medium term. For th

price as of March 6, 2013 was $107.875 with an average yield to maturity of 6.895%, whil

Group Ltd. bond which matures in 2018 recorded a last price of

2Historical data retrieved from Bloomberg as at

90

95

100

105

110

115

Digicel Group Ltd. Average Historical Bonds Prices

artment; March 11, 2013

the company’s assets are financed through debt. The interest coverage ratio of 1.56x for Digicel serves as

an indicator that the group is just about able to meet its interest payment obligations.

The foundation of Digicel’s success lies in its subscriber base which has significantly grown

. With a 27.5% increase from 2011, the subscriber base in 2012 stood at approximately 12.8

million. As Digicel continues to innovate in the field of wireless telecommunication services, this figure is

expected to grow exponentially year over year.

Bonds – Historical Data2

ond prices have been slightly increasing and it is possible t

medium term. For the 2020 bond, which was issued in September 2012, the last

price as of March 6, 2013 was $107.875 with an average yield to maturity of 6.895%, whil

bond which matures in 2018 recorded a last price of $111 with an average yield of 7.842%.

Historical data retrieved from Bloomberg as at March 6, 2013

Digicel Group Ltd. Average Historical Bonds Prices

2018, 10.5% 2020, 8.25%

Page 8 of 13

debt. The interest coverage ratio of 1.56x for Digicel serves as

interest payment obligations.

The foundation of Digicel’s success lies in its subscriber base which has significantly grown since its

at approximately 12.8

million. As Digicel continues to innovate in the field of wireless telecommunication services, this figure is

been slightly increasing and it is possible that this trend may

September 2012, the last

price as of March 6, 2013 was $107.875 with an average yield to maturity of 6.895%, while the Digicel

$111 with an average yield of 7.842%.

Digicel Group Ltd. Average Historical Bonds Prices

Prepared by: VMWM Research Department;

Digicel Ltd. Bonds – Historical Data

Digicel Ltd. has the intention of refinancing

from its most recent issuance (2021 maturity).

February 20, 2013. Since then the yields have been falling which is an indicator that the pric

increasing. As of March 6, 2013 the last price for the newest Digicel is

yield to maturity of 5.932%. The prices for the 2017 and 2020 bonds have been decreasing

however, it is possible that these bonds could provide

them for the medium term.

3Historical data retrieved from Bloomberg as at

90

95

100

105

110

115

Digicel Ltd. Average Historical Bond Prices

2014, 12%

artment; March 11, 2013

Historical Data3

Digicel Ltd. has the intention of refinancing its US$510 million senior notes due in 2014 with proceeds

(2021 maturity). The most recent Digicel Ltd. Bond was issued at

February 20, 2013. Since then the yields have been falling which is an indicator that the pric

, 2013 the last price for the newest Digicel issue was $100.42

The prices for the 2017 and 2020 bonds have been decreasing

it is possible that these bonds could provide attractive returns for investors wil

Historical data retrieved from Bloomberg as at March 6, 2013

Digicel Ltd. Average Historical Bond Prices

2017, 8.25% 2020, 7% 2021, 6%

Page 9 of 13

US$510 million senior notes due in 2014 with proceeds

The most recent Digicel Ltd. Bond was issued at par on

February 20, 2013. Since then the yields have been falling which is an indicator that the prices are

sue was $100.42 with an average

The prices for the 2017 and 2020 bonds have been decreasing marginally;

returns for investors willing to hold

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Digicel Bonds – Spread Analysis

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13

6 Month Historical Spread Analysis

US 10 Year vs DL 2020 Capjam 2021 vs DGL 2020 Jamair 2015 vs DL 2017 US 10 Year vs DGL 2018

Digicel Ltd bonds currently have a rating of B1/B (Moody’s/Fitch) while the rating of the parent

company (Digicel Group Ltd.) is Caa1/B- (Moody’s/Fitch). Based on this rating, it is evident that the

Digicel bonds are deemed risky especially when coupled with the country of risk (Jamaica; B3/CCC/SD-

Moody’s/Fitch/S&P). However, some of these issues may prove to be fairly attractive components, for

the portfolios of long-term investors with a moderate risk appetite who wish to buy and hold.

When weighed against comparable Caribbean bonds (JAMAIR 2015 and CAPJAM 2021), the yields on the

Digicel bonds may said to be moderately attractive. However, as of March 2013, there was a premium in

terms of yield for holding the CAPJAM 2021 bond over the Digicel Group Ltd 2020 issue, as well as for

holding the JAMAIR 2015 over the Digicel Ltd. 2017 issue.

For the US 10 Year Treasuries compared with the Digicel Group Ltd 2018 and Digicel Ltd 2020 bonds,

the positive spread is an indication of the premium investors will receive for holding more risky debt

over securities which hold the lowest risk of default (US treasuries). In comparison to the Caribbean

benchmarks, the benchmark 10-Year US Treasuries which are backed by the full faith and credit of the

U.S. government offer lower yields relative to other bonds because they are considered to have the

lowest default risk.

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Risk Factors

1. The wireless telecommunications operations market is heavily regulated and changes in

regulation could adversely affect the operations of Digicel Group Ltd. and its subsidiaries.

2. The company may be subject to unexpected political, economic or legal developments that impact

policies in countries where regulatory regimes are under reform such as Fiji and the Solomon

Islands.

3. Digicel Group Ltd. faces competition in the wireless telecommunications markets in which it

operates.

4. Digicel faces a fairly high exposure to Jamaica, which accounts for approximately 19% of total

revenue. This means that a relatively significant portion of the company’s revenue originates

from an economy which is struggling to revive while experiencing competitive telecom pricing

following the imposition of regulatory and additional government taxes.

5. Digicel Group Ltd. operates in some markets that are considered economically or politically

unstable for example Haiti (due to lack of certain infrastructure and the general poor condition in

the country), Fiji (has not held governmental elections since the military took over in 2006) and

Papua New Guinea.

6. Digicel may be affected by fluctuations in interest rates, which may have an adverse impact on

the business and its financial condition.Duration analysis measures this interest rate risk and

demonstrates the sensitivity of bond prices to a change in interest rates. Based on the duration

calculation, for every 100 basis-point (1%) decreases in interest rates for the aforementioned

Digicel bonds, it is expected the bond prices will increase by 0.97% (2014), 3.73% (2017), 5.48%

(2020-DL), 6.21% (2021), 3.85% (2018) and 5.48% (2020-DGL) respectively. Considering the

fixed-rate nature of these bonds, if there is any change in interest rates, investors will see the

bond price changes reflective of the increasing volatility associated with a longer time until

maturity.

7. Digicel is highly leveraged, which means that it utilizes more debt than equity to finance its

operations and investments. If this substantial debt increases any further, Digicel may arrive at a

financial position where it is unable to make interest payments which will then increase the risk

of default.

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Outlook & Recommendation

The financial performance of Digicel Group Ltd. and all its subsidiaries illustrate that the group has fair

economic fundamentals, while it has mentioned future plans for valuable strategic investments.

Although the company is highly leveraged, this position is expected to gradually improve over the

medium term as EBITDA grows and indebtedness remains relatively stable. Despite these positive

sentiments, one cannot ignore the negative impact which the telephone calls tax measures announced by

the Government of Jamaica will have on one of Digicel’s largest markets (as measured by revenue

generation). As a consequence of these measures, it will become more expensive for customers to make

telephone calls as the previously announced telephone calls tax (TCT) will now be incorporated in the

GCT tax base.

Digicel Group Ltd.

The Digicel Group Ltd. bonds currently hold a Caa1/B- rating (Moody’s/Fitch) as of 2012 which are

deemed as a very high credit risk. The rating of the 2018 and 2020 bonds issued by the company is

directly related to the reasonably high coupon rates which are set to compensate investors for the

additional risk. The 2018 bond recorded a price of $111 with a yield to maturity of 7.842% while the

2020 Digicel Group Ltd. bond recorded a price of $107.875 with a yield to maturity of 6.895% as of

March 5, 2013. However, in comparison to other Jamaican corporate bond issues, these Digicel bonds

may not be deemed as attractive to long-term investors. It is for this reason that we recommend both

Digicel Group Ltd issues (2018 and 2020) as a HOLD.

Digicel Ltd.

The Digicel Ltd. bonds currently hold a B1/B rating (Moody’s/Fitch) as of February 2013 which are seen

to be non-investment grade and highly speculative. The rating of these bonds is directly related to the

coupon rate which is set at a reasonable level to compensate investors for the additional risk. Digicel Ltd.

intends to refinance its US$510 million senior notes due in 2014 with proceeds from its most recent

issuance on February 20, 2013 (which matures in 2021). As a result we recommend the 2014 as a SELL

Prepared by: VMWM Research Department; March 11, 2013 Page 13 of 13

and the 2021 issue as a BUY. As it relates to the 2017 and 2020 bonds for Digicel Ltd., we recommend

that long-term investors should currently HOLD these bonds.

Sources: Bloomberg, Digicel Group Ltd., Central Intelligence Agency (CIA) World Factbook 2012, International Monetary Fund (IMF).Planning Institute of Jamaica (PIOJ).

Disclaimer: This Research Paper is for information purposes only. The information stated herein may reflect the opinion and views of VM Wealth Management in relation to market conditions and does not constitute any representation or warranties in relation to investment returns and the credibility of the sources of information relied upon in the preparation of this report, without further research and verification. Before making any investment decision, please consult a VM Wealth Management Advisor.