Credit ratings agency Moody’s has downgraded global satellite services provider Intelsat this week, stating that its debt structure has become unsustainable. The downgrade is hardly a surprise since insiders at Intelsat told the Financial Times last September that it was planning to sell off its Galaxy satellites.
As a result, Intelsat’s market cap stood at $815 million last year and has since plummeted to a mere $181 million. It’s undeniable that Intelsat’s debt pile is quite monumental, at a sum of $14.61 billion, and it has only managed to shave off around $15 million from this total in one year. Having said that, we believe that Intelsat either needs a partner or white knight or a successful sale of some of its assets. A suitable partner might allow it to renegotiate debt at lower prices, and with Intelsat’s tumbling share price, it’s looking increasingly likely that a private equity firm will see an opportunity to come in to carry out some major restructuring.
The satellite fleet operator still has $16.4 billion in total assets, of which around $6 billion is made up of satellites and other property and equipment. Rumors last year had it that John Malone’s Liberty Media, which tried to acquire Intelsat in 2007 in a joint bid with EchoStar, was interested in purchasing some assets of Intelsat, and French satellite operator Eutelsat was also believed to be eyeing up opportunities.
Not only do satellite services firms such as Intelsat have to compete with newer, more powerful satellites from the likes of rival SES, but also with increasingly more efficient fiber delivery on the ground. While satellites remain extremely valuable commodities, their value depreciates over time, as does their ability to generate revenue in a market with declining pricing.
Intelsat is set to launch its 29e satellite in Q2 of this year, its first high-throughput satellite (HTS), to provide services to fixed and mobile operators across the Americas and North Atlantic, and also the Intelsat 36 satellite is expected to launch in Q3 to support South African DTH services. The middle of this year will be a period of big spending with these new satellite launches as it attempts to gain new customers, but Intelsat stated last month that its cash requirements for debt repayment will increase in mid-2016. Intelsat CFO Jacques Kerrest said in a conference call with investors, “We have plenty of liquidity available to us. We are absolutely fine for now.”
HTS satellites bring a new problem to satellite operators, as they offer a much reduced per-megahertz pricing compared to traditional satellites, which Intelsat Chief Executive Stephen Spengler recently cited as one of the major pressures facing his company and the whole industry, as well as the emergence of new satellites in areas where supply is already exceeding demand.
Luxembourg-based Intelsat doesn’t have a particularly positive financial outlook for this year, forecasting full year 2016 revenue between $2.14 billion and $2.2 billion, compared to the $2.35 billion it pulled in during 2015 – down 4.9% from 2014.
SES is set to relaunch its SES-9 satellite later this week after an earlier failed attempt. SES-9, built by Boeing, carries 81 Ku-band transponders to provide DTH video, satellite broadband and backhaul for mobile communications to North-East Africa, the Middle East, South-East Asia, and portions of Oceania. SES, which has substantially less debt than Intelsat, also acquired digital media company RR Media for $242 million this week, and will merge it with SES Platform Services to create what Ayal Shiran, chairman of RR Media’s board of directors, called a “global digital media services powerhouse”.
Moody’s demotion of Intelsat comes shortly after Wells Fargo also downgraded the company, as well as RBC Capital, JPMorgan Chase & Co, Goldman Sachs and Zachs Investment Research which recently cut shares ratings.
Intelsat’s share price currently sits at $1.88, which is fractionally up since last week, but has fallen from $12.93 over the past year.
Moody’s justified the downgrade saying, “Our actions were prompted by a combination of business fundamentals and capital structure considerations that, from Moody’s perspective, signal the company’s debt structure has become unsustainable. In particular, while Intelsat’s major fixed satellite services peer companies report of challenging conditions in the network services sector, a segment that Moody’s views being highly commoditized, with Intelsat’s revenue mix disproportionately exposed to that sector, future growth prospects are uncertain. Additionally, while management views its new HTS as addressing commoditization, Moody’s wonders whether adding capacity to an already over-supplied market is a good move. With Moody’s expecting negative free cash flow in 2016 and leverage of Debt/EBITDA increasing to ~9x, it is uncertain whether the company’s cash flow generation can rebound to levels required to support the timely replacement of its revenue-generating assets.”