PARIS — Mobile satellite services provider Iridium Communications has managed to silence skeptics in recent years by making good on promises that many industry experts thought were untenable.
McLean, Va.-based Iridium now faces a fresh set of challenges that industry officials say make Iridium just as much of a high-wire act today as it was when it began operations.
When satellites operated by competitor Globalstar began suffering failures starting in early 2007, officials said Iridium’s satellites, which like Globalstar’s had surpassed their nominal in-orbit service life, would soon begin showing the same effects of age.
It has not yet happened, at least not to a degree of material importance to the satellites’ performance. Iridium has credited Boeing Co., which operates the Iridium constellation from its Leesburg, Va., satellite control facility, with flying the satellites in a way that minimizes wear and tear.
In 2009, in the teeth of a financial crisis that made competing equity investments much more attractive than they had been, experts said shareholders of GHL Acquisition Corp. of New York would never agree to purchase Iridium. The transaction was completed in September.
Iridium’s June 2 announcement that it had secured a 15-year, fixed-rate, $1.8 billion credit facility backed by France’s export-credit agency, Coface, appears to be the latest example of the company’s ability to navigate in rough weather.
But industry officials say there are at least three serious challenges remaining in front of the company as it builds its second-generation constellation of 72 in-orbit satellites, plus nine ground spares to be launched only in the event of a launch failure.
The three areas relate to the financing of the Iridium Next project outside of the Coface-enabled package; the feasibility of the satellite-delivery schedule; and whether Iridium has accurately assessed the commercial satellite-launch market.
Iridium is counting on its operating cash flow to pay a substantial share of the estimated $2.9 billion cost of Iridium Next. It is also counting as current equity some $261 million in outstanding warrants to purchase Iridium stock.
These include 13.7 million warrants with an exercise price of $7 per share, for a total of $95.9 million, and 14.4 million warrants with an exercise price of $11.50 per share, for a total of $165.6 million.
The problem is that Iridium’s stock, traded on the U.S. Nasdaq exchange, has been “under water” with respect to these warrants, meaning it has traded below the warrants’ exercise price. In the past year, Iridium stock has fluctuated between $6.30 and $12 per share. Buttressed by the announcement of the Coface package June 2, shares rose 6.2 percent, closing at $9.25.
In a May 10 filing to the U.S. Securities and Exchange Commission (SEC), Iridium said it cannot demand payment of the warrants until the stock trades “for an extended period of time at a per-share price greater than $14.25 for our $7 warrants, or $18 for our $11.50 warrants.
“Unless our stock price increases significantly, we would not expect the under-water warrants to be exercised and we will not be able to call any of the warrants,” the company said.
Iridium and its newly selected Iridium Next prime contractor, Thales Alenia Space of France, said the $2.1 billion satellite construction contract calls for spacecraft to be delivered starting in early 2015. As Globalstar has found out, satellite construction programs of this complexity rarely keep to their original schedules.
For Iridium, on-time delivery is especially important because the company forecasts its current satellite network will begin to degrade materially starting in 2015.
“Based on the failures and anomalies we have experienced to date, and considering the potential for future anomalies, we believe our current constellation will provide [a] commercially acceptable level of service through approximately 2014,” Iridium told the SEC in a March submission.
Iridium had originally planned for its second-generation satellites to be launched in 2013, and then pushed the date back to 2014 before agreeing to the early 2015 date with Thales Alenia Space.
The satellite builder will not start full-throttle construction of the Iridium satellites until the Coface-backed financial package is completed, a process that could take several months. To protect the 2015 delivery date, Iridium has paid Thales Alenia Space $53 million to cover three months’ work.
If the Coface financing is still not completed by late August, Iridium will make a second payment of $53 million for an additional three months of work.
The third area of risk is Iridium’s plan for launching its 800-kilogram second-generation satellites into their 780-kilometer orbit.
Iridium Chief Executive Matthew J. Desch said the launches will start in 2015 and be completed in 2017 — a rate of at least two satellites per month.
Depending on the rockets selected, the company may be able to place up to nine spacecraft on a single vehicle. While that would raise insurance underwriters’ concerns, it may also account for Iridium’s agreement to spend some $200 million more than it had planned to build nine additional satellites to be launched only in the event of a rocket failure.
Depending on when Iridium contracts for the launches, and on how many different vehicles are included in the mix, eight launches of nine satellites each over a 36-month period is feasible, industry officials said. But they added that Iridium’s estimate of commercial-launch prices appears optimistic. The company has budgeted $800 million to cover the costs of upgrading Iridium’s ground network, plus launching and insuring 72 satellites.
That works out to just over $11 million per satellite. Iridium disclosed to the SEC in May that it had made a $19 million deposit with an unnamed launch-service provider to lock in pricing terms for the Iridium constellation.
Industry officials said the company in question is Space Exploration Technologies (SpaceX) of Hawthorne, Calif., a startup company that has been advertising commercial launch prices that are far lower than prevailing rates for other vehicles that would be available to Iridium. But SpaceX has yet to prove its ability to deliver a regular launch service and maintain a viable business plan at its current advertised rates.
