Avanti secures funding for second satellite

The British satellite operator Avanti Communications has raised a total of £280m in equity and debt financing to fund the construction of its second Ka-band satellite, HYLAS 2.
Avanti has raised £86m through a share placement and has secured backing…

The British satellite operator Avanti Communications has raised a total of £280m in equity and debt financing to fund the construction of its second Ka-band satellite, HYLAS 2.

Avanti has raised £86m through a share placement and has secured backing for a £194m debt financing facility from the Export Import Bank of the United States (ExIm) and the French export credit agency COFACE.

HYLAS 2 will be manufactured by Orbital Sciences Corporation and launched by Arianespace in the first half of 2012. The satellite will provide dual redundancy for European customers on the company’s first spacecraft, HYLAS 1, which will launch in June 2010.

HYLAS 2 will offer 8280Mhz of capacity, more than double the 3000Mhz available on HYLAS 1. It will also extend Avanti’s coverage to Eastern Europe, the Middle East, and parts of East and South Africa.

Avanti CEO David Williams said: “With this second satellite, we achieve three important objectives. Firstly we diversify our risks by launch, satellite manufacturer and geography, meaning that Avanti is a lower risk company. Secondly we can provide in orbit resilience and redundancy, an important factor in the maturity of our offer to larger customers. Finally, we gain access to some exciting high growth markets whilst also providing existing customers in Europe with further capacity once HYLAS 1 is filled.”

“It is clear to Avanti that the market for Ka-band broadband services is growing at a much higher rate than originally anticipated. This project enables us to secure our position as a world leader in satellite broadband and one of the only companies with more than one Ka band satellite.

The share placement has been carried out by Cenkos Securities, Avanti’s usual financial advisor. In total, 21.5 million new shares were placed on AIM, the London Stock Exchange’s market for smaller, growing companies.

The shares were priced at 400p each, a little lower than the closing price of 438p held by the company on the Friday prior to the announcement of the new financing.

Williams said: “HYLAS 2 is a much larger satellite and therefore greatly increases our revenue and profit potential. With equity dilution of less than 50%, we gain additional satellite revenue generating capacity of 275%.”

The placement, which received strong support from investors, will represent approximately 32% of Avanti’s newly enlarged share capital. M&G Limited, which currently holds an 11.8% stake in Avanti, has committed to subscribe for 4,668,350 new placement shares.

Williams said: “All our principal institutions supported the transaction and bought more shares, but given the scale of the funding it was important to bring in new investors as well, which we did.”

“About 80% of placement was funded by institutions already on the register, but some of them had previously only made very small commitments, and have now gone up to full unit size.”

Export credit and economies of scale drive HYLAS 2 financing

The debt financing arrangements with the two export credit agencies comes in two forms. ExIm will be a direct lender providing a loan of approximately £135m, while COFACE will provide a £65m guarantee that will allow Avanti firm ground to complete the financing with a commercial bank that the company has already begun working with.

The COFACE guarantee is open for acceptance until March 2010, during which time Avanti will finalise its debt financing package. The debt facilities with COFACE and ExIm will both be drawn down during construction of HYLAS 2 and repaid over a seven-year period, with a total maturity of ten years. The aggregate annual interest of the two facilities is below 6%.

Avanti CEO David Williams told SatelliteFinance how its relationships with the satellite’s manufacturer Orbital Sciences and launcher Arianespace opened up the opportunity for such sustained export credit support.

“We had attempted to raise equity financing for Hylas 2 in October 2008,” he said. “Unfortunately we were on our roadshow to attract investment when Lehman Brothers went bust.”

“We had put a tender out in September 2008 and received bids from five manufacturers. Orbital were selected based on the schedule and price they offered, and their long and distinguished heritage as regards satellites of this size in particular.”

“I was then put in the position of having to tell them we couldn’t raise the financing for the project. Then, in January 2009, Orbital came back to us and told us that ExIm would be willing to get involved and provide financial support.”

Avanti developed its relationship with Arianespace last year, after it made the decision to switch the launch of the HYLAS 1 satellite from SpaceX’s Falcon 9 to the Ariane 5 rocket. HYLAS 1 is due to be launched in mid-2010.

Williams said: “When it became apparent that ExIm was willing to provide financing for HYLAS 2, we and Arianespace decided that it made sense to apply for COFACE backing as well.”

The cost of the HYLAS 2 project is low, considering that the satellite is offering more than double the amount of Ka-band capacity of HYLAS 1, and will be widening its coverage into Eastern Europe, the Middle East, and Africa.

Williams explained why the price is relatively lower. “We have wider coverage and less flexibility on HYLAS 2 – there are some components that were on HYLAS 1 that just aren’t on the new satellite,” he said. “It’s a simpler design, quicker to produce and requires no R&D, because that took place for HYLAS 1.”

One of the reasons the HYLAS 1 payload is so complex is that when it was first proposed to the financial community in 2005 there was not a strong backing for Ka-band satellite broadband in the financial community, and the satellite payload had be extremely flexible to ensure that it could have potential resale value in case the business plan did not work out.

While HYLAS 2 is a larger spacecraft than its predecessor, Williams does believe there are limits to economies of scale in the satellite broadband market. He said: “I don’t believe very large Ka-band satellites are a good idea. Unlike a large TV-oriented satellite, where you can fill it up one or two big deals, with Ka-band it is a case of selling capacity subscriber by subscriber. It takes a longer time to fill it up. What we have announced with HYLAS 2 is a medium-sized satellite, and I am confident we can fill it within three years of launch. This should give us time to procure another satellite to be available more or less at the point when HYLAS 2 is full.”

The new markets that HYLAS 2 expands into are areas still in strong need of satellite broadband coverage, as highlighted by the initiatives from other satellite operators such as Yahsat, Arabsat, Nilesat and Smartsat to provide Ka-band based internet services in the Middle East and Africa markets.

“I think in the Middle East and Africa, traditional telcos have more experience with satellite services than in Europe, because the relative lack of established infrastructure means there’s a larger expert customer base,” said Williams.

The rise in investor interest is further vindication for Avanti’s commitment to Ka band-based satellite broadband services. Given the growth in the sector, Williams believes that the argument in favour of the technology has been won, and that its potential has only begun to be tapped.

This is due to the extreme growth in consumption of online video, be it through simple video applications on websites, social networking and low-resolution sharing sites like Youtube, or high-quality programming services such as Hulu or the BBC iPlayer.

He said: “As data consumption rises, ADSL and wireless networks will increasingly struggle to deliver fast video services to customers at the edges of their coverage, so, paradoxically, the gap between the centre and the fringe is widening despite the speed of development in this area. The rollout of terrestrial broadband has given rise to our opportunity, so I think Ka band will be much bigger than just serving remote areas. There’s room in the market over the next fifteen years for several hundred Ka band satellites.”