NewSat Bankruptcy is Costly for U.S. Ex-Im Bank

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This story was updated June 2 at 12:10 a.m. EDT

PARIS — A U.S. bankruptcy court’s May 22 decision to allow Lockheed Martin to cancel a satellite construction contract with a near-penniless customer – startup satellite operator NewSat of Australia — has handed the U.S. and French export-credit agencies with their first satellite industry failure.

For the commercial satellite industry, the failure raises the possibility that export-credit agency financing, which has been instrumental to multiple satellite projects in the past decade, may retreat as a factor in the industry’s growth.

For the U.S. Export-Import Bank, the failure means the apparently unrecoverable loss of well over $100 million at a time when the Washington-based institution is fighting for its life in the U.S. Congress. The bank’s charter expires on July 1 unless Congress renews it.

For France’s Coface, the loss will be substantially less and may yet be recovered, depending on whether the same Delaware Bankruptcy Court agrees to permit Arianespace to cancel its NewSat contract or grants NewSat’s administrators more time to allow the company to sell the Arianespace contract on its own.

NewSat’s Jabiru-1 satellite has a contract to ride in Arianespace’s Ariane 5 rocket upper position, reserved for larger satellites, in late 2016. Evry, France-based Arianespace is otherwise fully booked into 2017, giving the NewSat reservation a potentially substantial value to other satellite operators.

As the Ex-Im Bank and Coface have become active in satellite financing, industry officials have warned that they are taking on risks that commercial banks have avoided — and with reason. The two agencies have pointed to the low default rates of their customers, and to the jobs they were creating in the United States and France.

Officials had assumed that the first big failure, if it were to come, would be from among the satellite projects whose assets are, in principle, less fungible — in particular, the low-orbiting communications satellite constellations.

Instead, it is the owner of a large geostationary orbit satellite, more than half completed by Sunnyvale, California-based Lockheed Martin, that is the first to tarnish the U.S. and French agencies’ financing judgment.

NewSat’s administrators — appointed by an Australian court as part of bankruptcy proceedings in that country that have run parallel to the Delaware court’s proceedings — had argued up to the last minute that with a little more funding from the Ex-Im Bank, and perhaps from Malaysian satellite fleet operator Measat, NewSat could survive. Measat, which has a satellite capacity-sharing agreement with NewSat, had agreed to invest in NewSat along with an unnamed financial investor, according to bankruptcy court documents.

But while negotiating day and night in New York, Measat and its partner could not finalize a deal by the May 18 deadline that NewSat’s administrators had agreed to with Lockheed.

Lockheed Martin argued that every day it continued to work on the satellite was piling more default risk on a project that had already defaulted, persuaded the NewSat administrators to agree to a May 18 deadline. They would find fresh financing to continue the project or allow Lockheed Martin to cancel the contract.

On May 21, NewSat administrators attempted to argue that they needed more time to conclude an agreement. But ultimately the court said a deadline is a deadline. The Ex-Im Bank, for reasons that were not clearly explained — the U.S. Justice Department lawyer representing the bank referred vaguely to “policy/business decisions” — refused to put up any funds to preserve its sunk costs in the project.

A refinancing was made more complicated by the fact that under Australian bankruptcy law, a refinancing effort that ultimately failed would put the administrators’ own personal finances at risk.

The administrators, who had no previous ties to NewSat and were in place only to help salvage what they could, therefore insisted on “absolute certainty” of a deal’s success before they would support it. They told the court they asked Lockheed to waive the personal-liability feature and that Lockheed refused.

“You’re talking about individuals with homes and families and college tuition and that sort of thing,” the administrators’ attorney told the Delaware court.

The bankruptcy court judge, in the May 21 hearing, expressed surprise that the Ex-Im Bank, with so much at stake, was unable to present a credible go-forward scenario by the May 18 deadline.

On May 22, the court ruled that the Lockheed Martin contract for Jabiru-1 is no longer in force. The company has received some $193 million for Jabiru-1, with an additional $78 million to complete the satellite.

That $193 million was mainly Ex-Im money lent to NewSat, in addition to equity NewSat had raised on its own. It is now in the form of a nearly completed spacecraft that Lockheed Martin owns and is free to sell without having to pay anything to Ex-Im.

Arianespace is hoping for a similar outcome from the court. Given the state of the commercial launch market, the European launch-service provider should have little trouble in selling the NewSat slot.

The Ex-Im Bank on June 1 issued the following statement in response to Space News inquiries:

“EXIM Bank remains in detailed discussions with all parties. The objective is to achieve project completion and to protect the interests of U.S. taxpayers. As with all transactions of this nature, we cannot comment on the specifics of these ongoing discussions.”

It was not clear whether the bank held out hope that it might recover some of its investment in the Jabiru-1 satellite despite the May 22 ruling of the bankruptcy court.