Editorial: Satmex Bondholders Take a Gamble

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There are times when a bad deal is better than no deal at all. EchoStar Corp.’s recent offer to buy cash-strapped satellite operator Satélites Mexicanos S.A. de C.V., commonly known as Satmex, may well have been a case in point. The offer was $267 million in cash plus whatever was left over from Satmex’s $107 million in cash reserves once transaction fees were subtracted.

For reasons known only to themselves, Satmex’s bondholders rejected the deal, leaving the company with no clear path to long-term health. It is true that Satmex’s current debt is valued at $424.5 million, well above EchoStar’s offer, and that Satmex has three satellites on orbit and a base of Mexican customers.

But only one of Satmex’s satellites, Satmex 6, is healthy on orbit. The aging Solidaridad 2 is in inclined orbit, severely limiting its revenue-generating potential, while Satmex 5, which is nearly fully booked, recently suffered failure of its xenon-ion propulsion system that will limit its remaining service life to less than three years.

A backup propulsion system on Satmex 5 failed several years ago. The company has been trying to order a replacement for the 11-year-old spacecraft, but has been prevented from raising the necessary cash by the same bondholders who rejected the EchoStar offer.

Satmex’s financial struggles are well known. Satmex went through bankruptcy reorganization in 2005, and a subsequent attempt to sell the company at auction was abandoned because bidders did not meet the minimum price threshold set by its ownership, including the bondholders and the Mexican government.

EchoStar’s interest in Satmex stems at least in part from its own difficulty gaining traction as a satellite services provider to the Americas, a market dominated by three large operators. By buying Satmex, EchoStar could have reaped some of the advantages conferred by size — the deal would have given EchoStar access to five orbital slots covering the Americas — while gaining access to a Mexican customer base. Apparently EchoStar had a backup plan: Just two days after its offer for Satmex formally expired, the U.S. company announced a deal in which it will lease capacity aboard two satellites owned by SES to offer service in Mexico via SES subsidiary Sistemas Satélites de México.

Whether or not Satmex’s bondholders have any kind of backup plan of their own remains to be seen. But if in the end the company or its assets wind up being sold off for a fraction of what EchoStar offered, which now seems a distinct possibility, the bondholders will have only themselves to blame.