With Healthy Backlog, Telesat Comfortable Taking On New Debt

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PARIS — Canadian satellite fleet operator Telesat, which has spent the last three years deleveraging following its 2008 purchase by Loral of New York and Canadian pension fund PSP, on Feb. 22 said it will take on new debt to pay its two shareholders a special dividend of $705 million.

Telesat Chief Executive Daniel S. Goldberg said the transaction, which could occur before May, was set at just under the threshold that would trigger adverse tax consequences for the shareholders.

A much larger dividend recapitalization was considered in 2011 following Telesat’s attempt to auction itself off, an effort that was abandoned when the offers fell short of what was demanded by Loral Space and Communications and PSP Investments. Tax considerations caused the shareholders to scrap the plan, and unfavorable debt-market conditions sidelined a smaller transaction as well, Goldberg said in a conference call with investors.

Ottawa-based Telesat operates 12 telecommunications satellites and has two on order and scheduled for launch in 2012. The company also operates the Canadian beams aboard the large ViaSat-1 Ka-band broadband satellite, which entered service in January.

Telesat in September signed a contract with Space Systems/Loral of Palo Alto, Calif., for the future procurement of a satellite whose payload and identity have yet to be determined. No payments were made on the contract in 2011, Telesat said in a Feb. 22 filing with the U.S. Securities and Exchange Commission (SEC).

Telesat officials have said they intend to replace the Telstar 12 satellite, which operates at 15 degrees west and is scheduled to run out of fuel in 2016. Whether the Space Systems/Loral contract will end up being Telstar 12 is unclear. Telesat Chief Financial Officer Michel Cayouette said during a Feb. 22 conference call that the company would enter into a contract this year to replace Telstar-12.

In the SEC filing, Telesat said its future ability to use the Ku-band frequencies of Telstar 12 may be in doubt.

The Russian Satellite Communications Co. (RSCC) of Moscow, Russia’s largest satellite fleet operator, has signaled its intention to launch a satellite to the 14 degrees west slot, one degree away from Telstar 12. The RSCC satellite would use some of the same frequencies as Telstar 12.

“RSCC’s … rights over certain frequencies at 14 degrees west have priority over our use of these same frequencies on Telstar 12,” Telesat said. “We have had discussions with RSCC to resolve this issue but, to date, those discussions have not been successful.

“Failure to reach an appropriate arrangement with RSCC may result in restrictions on the use and operation of Telstar 12 which could materially restrict our ability to earn revenue from Telstar 12 and any replacement satellite or may make a replacement satellite not economically viable.”

Telesat Chief Financial Officer Michel Cayouette said during the conference call that the company nonetheless expects to contract for a Telstar 12 replacement this year.

Telesat reports its earnings in Canadian dollars but almost all its revenue and debt is in U.S. dollars. The 5.3 percent decline in the U.S. dollar’s value relative to the Canadian currency during 2011 was enough to turn a revenue increase of 1 percent at constant exchange rates into a 2 percent decrease, to 808 million Canadian dollars ($808 million).

EBITDA, or earnings before interest, taxes, depreciation and amortization, was 77 percent of revenue in 2011, up from 75 percent in 2010.

As of Dec. 31, Telesat had nearly $3 billion in outstanding debt, for a debt-to-EBITDA ratio of 4.8. Cayouette said the company’s debt was more than eight times EBITDA several years ago, and Telesat was still able to grow the business.

Goldberg said during the call that adding some $530 million to the existing debt will not place undue stress on the company, especially given its current backlog of 5.4 billion Canadian dollars and the fact that Telesat’s capital spending on new satellites will be dropping this year with the launch of the two new spacecraft.

“We are comfortable operating at these leverage levels,” Goldberg said. “We have a certain amount of contracted revenue and our capex is going down. We have a lot of strategic flexibility.”

Telesat said its seven satellites serving North America were 91 percent full as of Dec. 31, while its five international satellites showed an 81 percent fill rate. The Telstar 14R/Estrela do Sul satellite launched over Latin America in August will be able to operate for 12 years with 60 percent of its 58-transponder capacity despite the deployment failure of one of its two solar arrays.

Telesat received a $132.7 million insurance claim in late 2011 because of the failure.

A large customer using one of Telesat’s direct broadcast satellites over North America secured a price reduction in July 2011, cutting that satellite’s revenue contribution for the year. Aside from that event, Goldberg said, the overall pricing environment for satellite bandwidth remained solid, especially in Latin America.

 

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