Digital 9 Infrastructure (DGI9 ) has taken a step to limit the high cost of the interest swaps hedging debts of portfolio holding Arqiva Group.

The company, which recently appointed a new portfolio manager after a long wait, has entered into an inflation ‘collar’ that will fix the swaps’ exposure to the retail prices index (RPI) between 2% and 6.5%.

While the collar is too late to prevent DGI9 from paying a £68m ‘accretion payment’ for its 48% stake in the UK terrestrial TV and radio network, it will prevent the cost spiralling again should inflation continue to exceed forecasts.

The arrangement applies only to Arqiva’s inflation-linked swaps and has no impact on the indexation of Arqiva’s recurring revenues, of which 70% are directly linked to RPI. These revenues are underpinned by long-term contracts with blue-chip customers, including the BBC, ITV, Channel 4, Sky, Discovery, and Thames Water.

The move also limits the downside exposure of Arqiva’s cashflows and improves visibility over the 8.5%-yielding investment company’s future dividend cover.

The targeted 6p dividend is expected to be fully covered in the next 18 months as ’golden goose’ asset Verne Global sees a £21m increase in cash generated from its pre-sold customer contracts and Aqua Comms’ Emic-1 undersea cable running from Europe to India comes online.

Recent news, including the hiring of Vodafone veteran Diego Massidda as its new manager and balance sheet improvements, have failed to rerate the shares, which fell 4% to 67.7p on Wednesday, widening the discount towards 40%, the widest in the sector. 

Analysts noted that while DGI9’s dividend cover will remain muted this year as a result of Arqiva’s 2023 payment, the collar was a step in the right direction.

Liberum analyst Shonil Chande said the collar is unlikely to have much material effect apart from providing some protection if the RPI index is above 6% annually at the end of March next year.

With DGI9’s share of accretion payments increasing £5.2m for every percentage point of inflation, had the collar been in place as early as 2021, DGI9 would have saved £54m, or 1.1 times its annual dividend, he said.

Stifel analyst Sachin Saggar said the collar arrangement seemed sensible given that upside risks to inflation remain the ‘main concern today’. He added that while the collar was ‘a bit late in the day’, there is some value in the structure even if the base case is that the 6% and 2.5% thresholds are not met.