Debt Weighs on Satmex Despite Revenue Increase

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PARIS — Satellite fleet operator Satmex of Mexico City delivered on its promise of increasing revenue and cutting costs for the six months ending June 30, but gave no sign that it has been able to renegotiate the terms of its debt so it can start building a badly needed new satellite.

The company, which emerged from Mexican bankruptcy procedures in November 2006, has been seeking a way to pursue work on a Satmex 7 satellite with manufacturer Space Systems/Loral of Palo Alto, Calif. In late 2008, Satmex created a subsidiary called Alterna TV that is intended to be the formal contractor for Satmex 7.

But since spending nearly $4 million in early development of Satmex 7 with Loral, Satmex has invested almost nothing in the project this year. Satmex has had occasionally strained relations with its bondholders, who under the terms of the debt covenants have set strict limits on how Satmex spends its cash.

For the six months ending June 30, Satmex reported revenue of $61.4 million, an 11.2 percent increase more than the previous year despite the fact that one of its biggest customers, satellite broadband service provider Hughes Network Systems of Germantown, Md., is gradually reducing its demand.

Hughes is migrating its new subscribers to its own satellite, the all-Ka-band Spaceway 3. As the monthly subscriber turnover eats away at the current subscriber base, Hughes is letting its Ku-band transponder-lease contracts expire.

In an Aug. 15 financial statement, Satmex said Hughes accounted for 21 percent of its revenue for the first half of 2009, compared to 23 percent a year earlier. Satmex’s second-biggest customer, Telmex Peru, accounted for 15 percent of revenue.

Satmex officials have said their two principal satellites, Satmex 5 and Satmex 6, are about 90 percent full. As of June 30, the company’s order backlog stood at $258 million, of which $55.1 million will be booked as revenue this year.

Only $66.2 million in backlog is reserved for service to be provided after 2011, an indication that Satmex has struggled to persuade video customers to sign long-term leases.

Satmex has renewed its Satmex 5 and Satmex 6 one-year insurance policies, with coverage remaining at $90 million and $288 million, respectively.

Satmex’s immediate challenge relates to the imminent retirement of the Solidaridad 2 satellite at 114.9 degrees west. Moved into an inclined orbit in March 2008, Solidaridad 2 has enough fuel to continue inclined-orbit operations until late 2009 before it must be retired.

Satmex officials had hoped Satmex 7 would take over shortly after Solidaridad 2’s retirement, but there are no signs that this will be the case given the stalled contract with Loral. It is not clear whether Satmex bondholders would permit the company to purchase a satellite already in orbit to replace Solidaridad 2.

Satmex 5, located at 116.8 degrees west, is a Boeing 601HP model spacecraft launched in December 1998. It is designed to operate for 15 years, but one of its two xenon-ion propulsion systems (XIPS) has failed, forcing Satmex to rely on the less-favorable remaining unit. XIPS failures were common to that generation of the Boeing 601 series, and the Satmex 5 insurance policy has excluded XIPS from coverage.

Satmex said that as of April 1, the satellite had enough conventional fuel to continue operating for 2.9 years if the remaining XIPS failed. The company said this estimate is not precise, in part because a consequence of using the secondary XIPS propulsion unit is that it causes “adverse effects such as contamination of the solar arrays and will require [accelerated] consumption of conventional fuel.”

Satmex’s debt, most of it in bonds, totaled $413 million as of June 30. The company’s losses are such that, under Mexican law, an investor could call for Satmex’s dissolution. Satmex says in its financial statement that it views this possibility as “remote, due to the specific plans that the company has agreed [to] with its shareholders for maintaining the company on a going-concern basis.”