TOULOUSE, France – Satellite fleet operator Intelsat, stymied in attempts to obtain investment-bank underwriting support for a debt repurchase because of an activist bondholder’s allegations the company had violated debt covenants, on June 30 said it had concluded a private placement of $490 million in debt to finance the repurchase of a portion of three of its bonds.
The transaction is designed to end a six-week blockage during which Intelsat was unable to get investment bankers comfortable enough to underwrite the bond repurchase following allegations by Aurelius Capital Management LP of New York, a private investment firm, that Intelsat had violated its bond covenants.Aurelius had spread allegations of loan default that had the effect of poisoning the deal for investment banks.
Intelsat said the privately placed notes had a maturity date of 2022, carried a 9.5 percent interest rate and were sold at 98 percent of their face value. The company also reduced the maximum payment it would make to holders of the three bonds subject to the tender, to $463 million from the previous ceiling of $625 million, apparently to steer clear of any issue that could provide fodder for Aurelius. The company again extended the deadline for tenders, to July 14.
Since its original May 12 announcement, the tender has proved popular with the bonds’ owners, some of whom likely made their purchases at even further discounted rates given Intelsat’s delicate financial position.
In its June 30 statement, Intelsat said owners of the three bonds have offered up a total of some $2.3 billion, or five times the maximum amount Intelsat set.
“As Intelsat moves to complete the tender offers, it expects to capture value for Intelsat while reducing overall leverage, resulting in a stronger overall financial structure, which benefits all stakeholders,” Intelsat said of the transaction.
The company’s business of leasing telecommunications satellite capacity to commercial and government customers has hit a near-zero-growth period. Intelsat must use a large percentage of its total free cash flow to service its debt, which as of March 31 was $15.8 billion, or about eight times its earnings before interest, taxes, depreciation and amortization (EBITDA).
Aurelius, which has declined to disclose the size of its own Intelsat bond holding, has exchanged a series of letters with Intelsat since May 13, the day after Intelsat announced its bond tender offer.
The language has been anything but friendly, studded with veiled threats of forcing a court case. Aurelius Chairman Mark D. Brodsky said Intelsat had defaulted on its loan terms in a September 2015 transaction in which one Intelsat-owned entity appeared to provide funds to another Intelsat-controlled entity.
At one point during the transaction, Aurelius said, Intelsat’s total debt surpassed the maximum of six times its adjusted EBITDA as set by its loan covenants. But not by much: Aurelius came up with a figure of 6.07 times adjusted EBITDA.
Aurelius has said it represents an “ad hoc” group that together represents 25 percent of the owners of an Intelsat bond due in 2020 that is subject to the tender offer.
Intelsat Chief Financial Officer Jacques Kerrest has gone back and forth with Aurelius’s Brodsky in exchanges of letters, demanding that Aurelius disclose its holdings and its motivations so that Intelsat could determine if the investor “has positions that would profit from causing harm to Intelsat.” Kerrest has denied that any of the transactions constituted a default.
Kerrest also bristled at “Aurelius’s approach in publicly claiming a default based on factual misstatements and theories.”
Brodsky has declined to say whether his company holds short positions in Intelsat’s bonds, in which case Aurelius would profit from any drop in value. He said Intelsat’s responses to Aurelius’s concerns, initially expressed in a seven-page letter, have done nothing to alleviate them.
“I invite you to be similarly terse and confident if – as we hope can be avoided – you hae occasion to try to persuade a judge that no default has occurred,” Brodsky said in his correspondence with Intelsat.
Aurelius affiliates made similar allegations of loan default in recent months against Oi SA, Brazil’s large telecommunications operator, which on June 20 filed for Brazil’s version of U.S. Chapter 11 bankruptcy protection.