Moody’s & S&P say Intelsat likely to proceed with ‘limited loan defaults’

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PARIS— Moody’s Investors Service and Standard & Poor’s on March 21 downgraded satellite fleet operator Intelsat’s credit rating, saying that while the company had sufficient cash flow to fund its operations it had moved a step closer to a partial loan default.

The two ratings agencies issued similar advisories, saying Intelsat will likely consider refinancing some of its debt at below par given that its meager growth prospects will not furnish sufficient cash to repay debt otherwise.

The downgrades came as Intelsat announced it would raise the amount of senior secured debt it would issue, to $1.25 billion from $1 billion. The bonds will carry an 8 percent interest rate and are due in 2024.

With $1.25 billion in additional secured debt on its books, Intelsat is less likely to be able to repay 100 percent of the principal on its unsecured notes, S&P said.

McLean, Virginia- and Luxembourg-based Intelsat operates a fleet of 50 satellites in geostationary orbit. Revenue has been declining in the past couple of years and is expected to dip again in 2016 before the company benefits from the full impact of its new Epic line of high-throughput satellites that Intelsat hopes will reverse the trend.

Revenue for 2015 was $2.35 billion. As of Dec. 31 the company’s total debt stood at $14.6 billion. Interest payments in 2015 totaled $890 million. Intelsat said its capital spending in 2016, mainly for Epic-class satellites, would be between $725 million and $800 million before declining in 2017, with a sharp decline in 2018.

The company in February hired Guggenheim Securities LLC to assess “balance sheet management activities” that Intelsat Chief Executive Stephen Spengler said was in no way a prelude to a Chapter 11 bankruptcy filing.

“We are not in a pre-Chapter 11 situation. I’ll just say no to that. We are of course looking at every opportunity in the capital markets that makes strategic sense to enhance our position, and that is Guggenheim’s role,” Spengler said in an interview after the Guggenheim announcement. “We don’t feel like we have to do anything dramatic. What we have to do now is get Intelsat Epic operating, develop our services and continue to invest strategically, like with antennas.”

In its assessment, Moody’s and S&P did not challenge that assessment, but said Intelsat is likely to proceed through a series of small loan defaults by refinancing certain of its debt tranches at less than par value.

Because of that, Moody’s moved Intelsat’s probability-of-default rating (PDR) to Caa3-PD from Caa2-PD. Moody’s defines Caa-PD ratings as investments “highly speculative, of poor standing, subject to very high default risk.”

Moody’s said the downgrade was prompted by Intelsat’s March 21 statement that its $1.25-billion debt issue would be used for “working capital purposes and to repay, repurchase, facilitate an exchange and/or restructure existing debt.”

The agency said it interprets the strategy as “a step towards a more comprehensive debt restructuring that the agency presumes will include interim steps in which outstanding debts are refinanced at less than par, and which [Moody’s] will likely interpret as comprising limited defaults.

“Otherwise, because Moody’s interprets [Intelsat’s new debt issue’s proceeds] as being used for refinance purposes, and will have little if any impact on what Moody’s considers an unsustainable capital structure, Intelsat’s CFR [corporate family rating] and all pre-existing instrument ratings were affirmed and the outlook was maintained,” Moody’s said.

S&P did not use the word “default” in its assessment but came to the same conclusion as Moody’s.

“We continue to believe the company could consider a subpar debt exchange or redemption as part of is balance-sheet initiatives, given current debt trading levels and our expectation for minimal organic deleveraging over the next several years,” S&P said.

The agency said Intelsat’s debt – 8.1 times its EBITDA, or earnings before interest, taxes, depreciation and amortization, in 2015 – will rise to 9.3 times in 2016, with negative free operating cash flow through 2017 because of lower revenue and EBITDA.

Intelsat said its $1.25 billion debt issue was expected to close on March 29.