Moody’s says Intelsat may need to downsize satellite fleet
PARIS — Moody’s Investors Service on May 17 left unchanged its investment rating for satellite fleet operator Intelsat in the wake of Intelsat’s offer to purchase $625 million in debt at below par value, saying a March downgrade of the company had already anticipated the move.
The agency said Intelsat appears on track to ease short-term liquidity issues and retains several possible options including the sale of part of its 50-satellite fleet.
Moody’s said it would nonetheless affix a “limited default indicator” to those bonds subject to Intelsat’s current tender and would wait about two months before taking a fresh look at the company’s financial health.
McLean, Virginia- and Luxembourg-based Intelsat has disputed the use of the term “default,” saying they were simple tender offers to note holders who, in many cases, had themselves purchased the bonds at a discount to their face value. For these investors, the offer would provide a profit on a short-term investment.
In what appeared to be a reaction to the high demand for the tender, Intelsat on May 18 said the terms of its latest offer, for up to $625 million in three tranches of unsecured bonds due between 2021 and 2023, would be tightened to offer slightly less cash to the bond holders than what was initially offered on May 12.
Instead of paying between $710 and $755 per $1,000 of principal, the company will pay between $657.50 and $685 per $1,000. The $20 premium for early tenders remains intact.
Intelsat, which operates a fleet of 50 satellites in geostationary orbit, is struggling to service $15 billion in debt at a time of slow growth in its satellite telecommunications business. Just to maintain its current fleet requires a capital investment in about three satellites per year.
Intelsat in March sold $1.25 in secured debt, carrying an 8 percent interest, due in 2024. It is this cash that the company is now using to purchase a limited amount of its unsecured debt.
The first tender resulted in the repurchase of $459.8 million in unsecured debt, concluded in early May, in what Intelsat described as “a combination of open market and privately negotiated purchases at varying discounts to the par amount.”
The second step, announced May 12, was for up to $625 million held by an Intelsat entity called Intelsat Jackson Holdings S.A.
In its May 17 assessment, Moody’s referred to these transactions not as defaults – although the agency said each such transaction meets Moody’s definition of an “event of default” – but as “distressed exchange activity.”
Moody’s speculated that Intelsat soon would make similar discounted offers to owners of senior unsecured debt paying 6.75 percent interest and due in 2018, a transaction that would ease near-term debt-service pressure.
The agency said it had decided to treat the entire series of transactions on completion, which it estimates will occur within 60 days, rather than make ratings adjustments for each one.
Moody’s noted that the entire fixed satellite services sector was under pressure given the economic slowdown in certain regions coupled with an increased supply of satellite bandwidth.
Still, it said, “Intelsat’s significantly declining results are the exception and, in Moody’s view, signal a potential lack of cash-flow self-sustainability.”
Fresh concerns about the near-term prospects for the major satellite fleet operators were raised after Paris-based Eutelsat’s sharp revenue and profit warning, issued May 12. Intelsat, Eutelsat and Luxembourg-based SES are the three biggest global commercial satellite fleet operators.
Their businesses are not interchangeable. Each has its own unique business focus. But they are similar enough that a problem in one will rattle the nerves of investors in the other two.
Moody’s said Intelsat’s debt-to-EBITDA ratio is likely to remain at about 9.1, a level that would keep the company’s overall corporate investment rating at Caa1, which the agency defines as “highly speculative, of poor standing, subject to very high default risk.”
But a successful completion of the current round of debt repurchases at substantially below face value will ease pressure for a time.
“With cash to address near-term maturities, adequate [debt] covenant compliance, and satellites or transponders [that] can be sold off, liquidity has been assessed as adequate,” Moody’s said.