Intelsat reported impressive full year results that saw revenue grow 6% to US$2.5bn, and adjusted EBITDA rise by 7% to US$2bn. However, it also recorded a net loss of US$781.7m, a figure that comprised US$499.1m in non-cash charges for orbital…
Intelsat reported impressive full year results that saw revenue grow 6% to US$2.5bn, and adjusted EBITDA rise by 7% to US$2bn. However, it also recorded a net loss of US$781.7m, a figure that comprised US$499.1m in non-cash charges for orbital impairments.
The figures come off the back of a year in which Intelsat made judicious use of the bond markets in refinancing its debt, replacing more than US$900m of its most junior debt through the issuance of senior debt.
The company was also active in the terms of acquisitions, beating off strong competition to win the auction for the ProtoStar-1 satellite with a US$210m bid in late 2009.
SatelliteFinance spoke to Intelsat CFO Michael McDonnell to learn how the company plans to approach its financing activities in 2010 and beyond.
Will you be as active in the bond market this year as you were in 2010?
We were opportunistic in 2009, we were actually less active than we have been in many other years, but more active than perhaps we expected to be going into the year, as we felt that the bond markets might be really challenged and I think they ended up being a lot more friendly than we had expected, so we did a couple of really good opportunistic deals in 2009.
I would say we will continue to manage our maturities, minimise our costs of capital and look for opportunistic ways to do that in the markets in 2010 and every other year. How many times that means we’ll be in or out of the market I don’t know, but certainly we’ll look to be optimisers at all times.
Will you repeat the kind of financing you undertook last winter, when you issued new notes worth US$500m to repurchase a section of your existing PIK notes?
That transaction was a little easier at that time because the bonds that we bought in were performing very well, but they were priced very attractively and now, due to market technical reasons, they’ve traded up to where it would be a lot more expensive to do that same transaction.
I wouldn’t rule anything out, but that’s something that’s a bit harder to do today.
Are you aiming to further streamline your debt?
Over time, we would like to reduce our debt-to-EBITDA leverage ratios, either through deleveraging or just growing our cash flow. Certainly, simplifying our capital structure over an extended period of time is part of that and something we’d like to do.
How realistic is it for Intelsat to speak of deleveraging when the company has to keep up with interest payments?
Right now we’ve got substantial interest payments but we’re in the heavier portion of our capex cycle so deleveraging over the last couple of years has been more about growing EBITDA so that debt to EBITDA ratio goes down. Having residual cash flow to delever with is a little harder to do.
I would say that as we move beyond 2012, which is when we expect 9 out of 10 of the remaining satellites that we have in development to be launched, our capex will be much lower and there’ll be a lot of residual cash flow that could be utilised for a lot of different things. Deleveraging might be one of them.
Will you look to other means of reducing the debt besides the bond markets?
I think that the market rates have come down quite a bit. When I talked about the transaction we did in the early part of 2009, on the one hand while we were able to buy bonds in at a substantial discount and we couldn’t readily do that today, the interest rate on the new bonds that we issued was 11.625%, and we could now issue much lower than that.
So, there are some refinancing transactions where you could refinance debt with lower cost debt. In certain cases you have premiums you have to pay, but the quick answer is refinancing more expensive paper with cheaper paper.
You used the leftover proceeds from the winter US$500m note issuance to part-finance the ProtoStar-1 acquisition. Will you look to continue approaching future debt management with a view to strategic synergies in the future?
Potentially. With the repurchase of the Bermuda notes, we liked that transaction on the surface, we liked it for what it was. It just so happened that we knew the ProtoStar satellite was coming to auction and that it would require a cash payment if we were to be successful, and we felt that since we were in the market anyway it was an optimum time to create a bit of a buffer. Whether or not we would couple the two together again just depends on the transaction and the timing.
Can major deleveraging only occur as and when the current Intelsat owners sell on to a new investor that would look to clear the debt?
I think you can deleverage to some degree as you get beyond the current bill cycle and you have a lighter capex load.
I think the real quantum leap in terms of significant rapid deleveraging comes in the form of some catalysing event.
What level of debt would be necessary for an IPO to take place?
That’s for the public markets to decide. I tend to think this business runs very comfortably at high levels of leverage. Does that mean 6x EBITDA? I think that’s for the markets to decide if we ever get to that point.
Has your debt level ever affected your ability to take advantage of a market opportunity?
We find ways to do things that are opportunistic. There have not been any significant opportunities that we’ve looked at and passed on because of our leverage.
One great example would be the New Dawn satellite, where we had a great opportunity and the credit markets were just closed. In December 2008 when the credit markets were in their worst available spot we were able to arrange a limited recourse financing arrangement over that one satellite, it was a very creative structure in that market.
Are any more New Dawn-type deals likely to take place this year?
I’m not aware of anything coming up. That’s something that we would replicate if the opportunity presented itself and was at the right cost of funds. We would compare the merits of doing a structured financing like that with what we could do in the traditional markets we’ve been in and go from there.
Is that kind of deal more likely to take place in an emerging market?
Hard to say. In that particular deal we had a partner in Convergence Partners, they were able to help in facilitating the relationships with the banks so it all came together, so perhaps it is more likely in a market like that.
What about in-orbit assets that come on the market, like ProtoStar-1? Do you see any similar opportunities arising?
That was a unique opportunity. There aren’t too many instances where you have a perfectly healthy satellite that doesn’t have a place to park and it goes up for auction. We certainly would take advantage if another opportunity presented itself, but it’s not something we expect to come along that often.
The major FSS operators have performed excellently throughout the financial crisis. Is there any course of events that could damage their momentum?
The industry has shown very strong resilience and held up extremely well through a very difficult recession. It’s proven that operators are providing a critical infrastructure service that is important to customers and they’re less likely to stop paying the bills than in other industries.
Certainly, over-capacity is always a risk. You would point to that because it’s happened before in the industry, but I think the good news there is that all the operators are showing good discipline, much more so than prior to the last incidence of overcapacity.
It’s something you always have to keep your eye on, but we feel really good about what’s coming on to the market and the market’s ability to absorb that.
Certainly in certain regions fibre is a worthy competitor, but you look in the emerging markets, where we’re strongest, it is such a long way out – there’s vandalism with fibre and it’s not something to worry too much about.
You have other ancillary things such as access to space. The launch provider situation is something we’re watching very closely. Is that going to stop the operators from doing business? No, but it could cost a heck of a lot more to do launches.
