Wall Street Analysts Warn of Export-credit Financing Bubble

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NEW YORK — The growing popularity of export-credit agency financing for satellite projects has some on Wall Street worried that a kind of bubble has developed that could pop if one of the funded projects cannot meet its loan commitments.

Addressing the Satcon conference in New York Oct. 13, the financial analysts stopped short of pointing to any specific satellite project as being a likely Chapter 11 bankruptcy candidate.

But they made clear that with so many satellite systems, mainly for telecommunications, now receiving export-credit assistance, the chances are rising for a loan default that could cause a general pullback by the agencies.

“Some of the [export-credit agency-backed] projects could not have been done in the private sector because they don’t, in fact, make sense,” Fred Turpin, managing director for JPMorgan Chase, said. “At some point, the music stops. And when it does, you don’t want to be the guy next in line for a loan, you want to be the last guy who got a loan.”

Figures compiled by the New York law firm of Milbank, Tweed, Hadley & McCloy LLP, which is a frequent adviser to satellite operators, show that one-third of all satellite project financings in the past three years have featured export-credit agency (ECA) financing. That is a total of more than $6 billion in loans and loan guarantees made at below-market rates, with better-than-market repayment terms.

“The rates are unmatched and the [loan] covenants are flexible,” James Murray, a managing director at Morgan Stanley, said. At this point, he said, the question of whether ECA involvement distorts the market is almost beside the point: Such financing is popping up everywhere.

Milbank Partner Peter D. Nesgos said many more projects — including satellite operators in the Middle East, Russia, North America and East Asia — are awaiting final approval of ECA backing.

The most active export-credit agency has been France’s Coface, but the U.S. Export-Import Bank and the Chinese government also have been in the market to secure work for their domestic satellite or rocket industries. Nesgos noted that the Russian government has been notably absent, but said “they are probably going to need to be to support their satellite and launcher industry.”

Securing an ECA loan or loan guarantee is not always easy, and is often much more time-consuming than securing private financing. “We signed up a deal in July and it still hasn’t closed yet,” Nesgos said. “That would be considered unusually long in the commercial world. A six- to 12-month time frame is not a bad rule of thumb for ECA transactions.”

Up to now, the track record of ECAs in the satellite sector has been good, which has stimulated more such transactions, even among established, profitable satellite operators for whom access to commercial financing is relatively easy, such as satellite fleet operators SES of Luxembourg and Inmarsat of London.

The question, Nesgos said, is what will happen if one of the ECA-backed projects ends up in restructuring because it fails to meet the terms of its loan. Does the ECA step in to provide more credit if it will mean continued employment for satellite engineers? Murray speculated that such an event would affect the entire ECA-backed satellite sector. “What we’ll see is a contraction of the long tail we have now if one of them gets burned,” Murray said. “Who will step up to refinance when a default comes?” Until then, these analysts agreed that just about any satellite project anywhere should avail itself of ECA backing, which can spare the project sponsors of the necessity of ceding equity in the projects.