Intelsat turns the page on bondholder threat, says it’s free to pursue de-leveraging

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PARIS — Satellite fleet operator Intelsat on Sept. 27 said it had put a bondholder’s loan-default threat behind it and would pursue its balance-sheet restructuring as intended.

The company specifically said it would continue bond-repurchase transactions of the kind it has recently conducted, using part of the $900 million it has on hand to chip away at its debt.

Addressing a Deutsche Bank investor conference, Intelsat Chief Financial Officer Jacques Kerrest said the company was no longer concerned about written threats from bondholder Aurelius Capital Management of New York.

Aurelius had written four public letters to Intelsat warning that the company’s bond-repurchase maneuvers were handled in a way that could be considered as breaching certain loan covenants.

Kerrest conceded that Intelsat was thrown off stride by Aurelius — whom he did not name — but has since been reassured that its behavior was well within bounds.

“We received four nice letters from someone,” Kerrest said, referring to the Aurelius correspondence. We responded to two out of the four. We got a little bit delayed in doing some of the things we want to do. The company feels more comfortable now. We feel very comfortable with our legal position on anything that was raised in these four letters.”

Intelsat announced Sept. 27 that it had concluded the latest of its bond-repurchase moves, buying bonds due in 2022 and paying 6.625 percent interest and selling to the bondholders senior secured notes due in 2024 and paying 8 percent interest.

“We have a goal of de-leveraging the balance sheet by let’s say one-half or three-quarters of a turn,” Kerrest said, referring to the company’s current ratio of debt to its EBITDA, or earnings before interest, taxes, depreciation and amortization. “ That’s what we believe we are going to achieve. Today we have about $900 million in cash. We don’t intend to keep this in cash.”

Kerrest said Intelsat’s early experience with the first of seven Epic high-throughput satellites bolsters the company’s forecast that the Epic spacecraft would be filed to 40-60 percent of capacity within three years of entering service.

He said Intelsat is confident that the fill rate will be even higher than that, especially since the first competing high-throughput satellite, being built by SES of Luxembourg, will not be in service before late 2017.

Fleet to shrink from 50 to less than 40 satellites over time

Kerrest said Intelsat is taking a fresh look at its capital spending and its operating costs as well to reduce cash demand.

Intelsat Investor Relations Vice President Dianne J. VanBeber told the investor conference that Intelsat’s current fleet of about 50 satellites generates most of its revenue from a core group of 35-38 spacecraft.

As its older, wide-beam satellites retire, they will not all be replaced. The Intelsat-9 series is now being gradually retired, and the Galaxy satellites are scheduled for retirement early in the next decade.

“If you look out 15-16 years, our fleet probably gets down to the high 30s or 30,” VanBeber said. “The fleet size is going to go down.”

VanBeber said Intelsat’s Media business will be helped by about $70 million in annual revenue coming from two large satellites now in service for DirecTV Latin America.

There are no major renewals among Media customers before 2018-2019, VanBeber said. Some will recommit but at reduced volumes as they move to MPEG-4 signal compression. But ultra-high-definition television should be entering the market by them, at least partially offsetting the MPEG-4 transition effect.

Loss of Navy contract is only $30 million, half off-network

Intelsat’s government revenue has been struggling as the U.S. Department of Defense has cut back on new contracts for commercial satellite capacity. Intelsat is counting on the U.S. military to become a large user of Epic capacity once ongoing demonstrations have proved what Epic can do.

Intelsat’s loss of the U.S. Navy Commercial Broadband Satellite Program Satellite Services Contract (CSSC) to rival Inmarsat of London’s U.S. subsidiary came after a long struggle. But VanBeber said Intelsat has been generating only around $30 million in annual revenue from the contract, with more than half of that coming from capacity used on non-Intelsat satellites.

Intelsat, as contractor for the CSSC program, generates much lower profit on capacity from partners’ satellites than it does on its own satellites.

The CSSC contract ends in October, but may be extended if the customer determines it needs more time to transition from Intelsat to Inmarsat.

Bad debt: ‘Tell me where Venezuela’s going’

As is the case with some of its competitor fleet operators, Intelsat is coping with the fact that several large customers in Latin America and the Middle East have not been able to meet their contract payments.

Kerrest said in Intelsat’s case, bad debt could move Intelsat’s quarterly revenue by as much as $3 million to $5 million. He said it’s impossible to predict how this will evolve.

“If you could tell me where Venezuela is going to be in six months, I’ll tell you where our bad debt is going to be,” Kerrest said. “We had some bad-debt experience in the first six months. we have exceeded the bad-debt-expense budget the company put together for the year already. There are two or three places. Venezuela is one. We have another place in Latin America and another in the Middle East. I myself spent time trying to do some of the collections. It is very difficult.”