Intelsat: No news on debt restructuring, good news on performance of 1st Epic satellite
PARIS—Satellite fleet operator Intelsat on April 28 said tests of its first Epic-class satellite, Intelsat 29e, have confirmed the performance levels the company had been predicting and that the satellite would enter service by late May.
Intelsat’s Epic high-throughput satellites (HTS), operating in Ku-band, are designed to appeal to markets including aeronautical and maritime users, cellular-backhaul, machine-to-machine and the emerging Internet of Things.
Several satellite operators have ordered HTS satellites in Ku- or Ka-band, but none has as much riding on their near-term success as Intelsat.
The company is contending with the same slow-growth patch that all major fleet operators are traversing as the industry seeks new growth pockets. But unlike its major competitors, Intelsat’s maneuvering room is limited by its $15.8 billion in debt as of March 31.
In the first three months of 2016, the company paid $216.9 million in interest on its debt, equivalent to 52 percent of its EBITDA, or earnings before interest, taxes, depreciation and amortization.
Intelsat is walking a tightrope between the need to remain within the constraints of its debt covenants and the imperative of investing to capture opportunities for revenue growth.
New satellite programs, mainly Epic HTS models, will cost Intelsat an estimated $762.5 million in capital spending in 2016 and $662.5 million in 2017 before dropping to around $475 million in 2018.
Intelsat has hired Guggenheim Securities to advise the company on how to restructure its debt to buy time that Intelsat managers say will put the company on a new path to Epic-propelled growth.
In an April 28 conference call with investors, Intelsat Chief Financial Officer Jacques Kerrest referred the Guggenheim-assisted assessment as a “liability management exercise.” He said the process, which started with a $1.25 billion bond raise in late March, was continuing. He declined to specify what measures were being considered.
Intelsat Chief Executive Stephen Spengler has said the company has spent a decade with substantial debt – a legacy of successive leveraged buyouts by private-equity investors – and would work through this difficult period as it has done in the past.
Spengler said the Boeing-built Intelsat 29e, launched in January, is just as powerful as Intelsat had hoped. Because it is the first Epic-class satellite, Intelsat is taking longer than usual to complete in-orbit testing. Commercial service should start by the end of May, he said.
With its growth now tied uniquely to new satellite launches, Intelsat is all the more affected by even slight launch delays.
That is why the delay in its next launch, of the Intelsat 31, has been a concern. Much of the satellite’s capacity has been leased, for its full 15-year life, to DirecTV Latin America. Originally set for 2015, the launch has suffered repeated delays, partly due to schedule slips of its Russian Proton rocket.
The launch has slipped again, to May 28 from early May, meaning Intelsat’s Media division will not see the anticipated revenue jump until the third quarter of this year.
Two more Intelsat satellites are scheduled for launch later this year and both remain on schedule, Spengler said.
“Incremental revenue from all four of our 2016 satellite launches is essential to offset the revenue pressure that we expected to shadow our financial results,” Spengler said.
Until the new satellites arrive, Intelsat is managing a business that is in slow decline. Revenue for the three months ending March 31 was $553 million, down 8 percent from a year ago. EBITDA, at $418 million, was down 11 percent.
Spengler sought to dismiss market speculation that the company’s core broadcast business, especially in North America, was eroding as broadcasters shifted to terrestrial technologies.
He said the company’s big North American broadcast contracts are not up for renewal before 2018, and that broadcaster contracts being renewed recently show no downward trend in the established satellite “neighborhoods,” or orbital slots with well-established television portfolios.
A five-year contract with the U.S. Navy, set to expire in May, may not go down to zero immediately because of the delayed award process that started when Intelsat protested the fact that competitor Inmarsat of London won the new contract.
A renewed bid process the Commercial Broadband Satellite Program Satellite Services Contract (CSSC) was also protested, then withdrawn, and a third bid request was recently issued. Intelsat responded on April 1 and is awaiting a response.
Spengler said a CSSC contract renewal had never been part of Intelsat’s revenue forecast. The company’s government business in the first three months of 2016 actually increased 4 percent, to $104 million, compared to the previous three months.
But as with the media business, the government division’s performance in 2016 depends in part on the outcome of this contract, which in the past five years generated less than $50 million per year in revenue.
“[O]ur [Government] revenue trajectory over the balance of 2016 is highly dependent upon the outcome of the CSSC contract and the degree to which temporary extensions are contracted by the customer,” Intelsat said in a statement accompanying its earnings report.