Fixed service satellite (FSS) and mobile satellite service (MSS) operators saw a relative slowdown in 2009, but, in a demonstration of the strength of the industry, both sectors posted revenue growth and solid margins. This resilience, at a time of large…
Fixed service satellite (FSS) and mobile satellite service (MSS) operators saw a relative slowdown in 2009, but, in a demonstration of the strength of the industry, both sectors posted revenue growth and solid margins. This resilience, at a time of large financing requirements for both sectors, has resulted in a dynamic market for equity and debt financing in recent months.
The FSS sector remains solid through the economic crisis
According to Euroconsult research and to the upcoming findings of the new edition of the “Satellite Communications & Broadcasting Markets Survey” that will be released in July 2010, the FSS sector continues to deliver a solid performance.
Overall, the sector saw a slowdown in satellite capacity usage last year. The growth rate for “regular” capacity usage, which excludes capacity from dedicated broadband satellites (primarily in Ka band), dropped to 5.3% last year, down from the average of around 8% in the three previous years. Still, this reflected a strong performance compared to overall global economic growth, and this slowdown was anticipated for structural reasons, as the sector had seen a takeoff of different segments between 2005 and 2008. Furthermore, the growth in emerging regions was higher than the average, with at least four regions presenting growth close to, or higher than, 10%.
In that context, the average EBITDA margin for the sector remained high, at around 73%. In addition, the high average fill rate of the FSS satellite fleet, of 77%, should give investors confidence in the ability of operators to sell capacity on new satellites.
MSS operators see positive demand drivers despite the crisis
With the global economic crisis still in full sway in 2009, the MSS industry was growing at a slower pace than in previous years, with some MSS operators even reporting a decline in revenue. Global operator revenues stood at US$1.27 billion for the six MSS operators currently active, reflecting 2.7% industry growth from 2008 – the lowest for the last three years. The top three MSS operators accounted for 90% of industry revenues, with Inmarsat alone accounting for 55%. Inmarsat was also the only MSS operator that recorded significant growth throughout 2009 (9.5%) while Iridium, Globalstar and Orbcomm all reported a decrease in revenues. Even though Thuraya does not report financial information publicly, Euroconsult estimates that their annual revenues did not grow, given the unfavorable market situation.
With the turmoil of the global economy, customers in MSS vertical markets tightened spending somewhat on new services in 2009, with planned MSS installations postponed or even cancelled during the year. New customer acquisition has proven difficult for MSS operators, with Iridium, Globalstar and Orbcomm reporting significant declines in revenue from their equipment businesses, a key indicator of new customer acquisition. However, early results of 2010 indicate that the market is about to rebound
Despite the economic downturn, most MSS operators reported strong growth in service revenues, an indication that business from existing customers was holding up. Growth remains to be driven by data applications, in particular MSS broadband (BGAN, FleetBoradband, Openport) as well as low-data-rate M2M services.
With the introduction of Inmarsat’s new IsatPhone and the return of Globalstar, 2010 and 2011 promise to be exiting years for the MSS industry, with more competition and a greater variety of services.
A few quiet months on the financing front in 2009, before a rebound of financing initiatives in the satellite sector
In 2009, the deepening of the financial crisis froze a number of financing initiatives in the satellite sector. At Euroconsult, we initially saw a temporary pause in requests for due diligence assessments in support of financial transactions, but this was followed by a strong rebound in the fourth quarter. In the past nine months, we conducted as many due diligence missions as in the previous 18, with projects concerning start-up projects, replacements of existing assets, debt refinancing and M&A transactions.
Although not all satellite projects may succeed in raising funds, the diversity of stakeholders considering satellite projects, ranging from private equity funds to public and private lenders, underscores the attractiveness of the industry. Still, investors and lenders remain relatively risk adverse, and continue to require a detailed review of business plans and of the competitive positioning of companies seeking financing, as well as solid technical due diligence. Decision cycles from financing providers remain relatively lengthy, and require a long-haul commitment from the management teams at satellite companies.
Government support – either directly through bank guarantees or indirectly through long-term contracts for capacity usage – has been key to facilitating fund raising by several satellite companies in recent months.
Financing of FSS operators now dominated by ECA backed loans
After a wave of IPOs in the FSS industry in 2005, financing of FSS operators has reverted to traditional debt and private equity in recent years. However, the conditions for financing changed dramatically with the financial crisis starting in summer 2007. Before then, the debt markets were wide open, and highly-leveraged financings were a common practice. But the collapse of the capital markets and the lack of market liquidity made banks and investors very selective as to where to put their money. Conditions to obtain debt financing became considerably tougher.
Debt financing has come back from highly risky and innovative funding structures to a more traditional project financing. In particular, the use of export credit agencies (ECAs), led by French Coface and the U.S. Ex-Im Bank, has dramatically increased over the last 18 months. In 2009, loan volume in the FSS industry (including O3b) that was backed by ECAs stood at close to US$2.5 billion, more than the combined total of the previous five years. Even large and established operators such as SES with relatively good access to capital have turned to ECAs-backed financing.
Major ECA financings for FSS operators in 2009*
*Mainly including COFACE, Ex-Im Bank, and Export Development Canada
Some of the major financings for FSS satellite operators in 2009/2010 with ECA involvement included:
“SES financing of four EADS Astrium-built satellites through a Coface-backed loan of ?523 million.
“Avanti Communication’s financing of the Hylas 2 satellite through a credit facility higher than US$300m involving both Coface and Ex-Im Bank.
“B-Sat financing of a new broadcast satellite B-Sat 3c, shared with JSat, of around US$140 million.
“Indosat’s financing of the Palapa D satellite for less than US$200 million.
“O3b satellite constellation financing of US$465m supported by Coface guarantees.
“Financing of the Star One C2 satellite through a Coface-backed loan of around US$140 million.
“Asia Broadcast Satellite financing of ABS-2 through a mix of vendor financing, bank debts and payments of SingTel for part of the transponder capacity on the satellite involving both Coface and Ex-Im Bank.
“Hughes Network Systems secured financing for the launch of its Jupiter Satellite scheduled for 2012.
ECAs-backed financing is also being used in the MSS sector where in particular the operators of the two LEO constellations, Globalstar and Iridium, were able to secure large Coface guarantees, which has represented a major milestone in their financing process.
In 2009, Globalstar announced a US$738 million financing agreement including a US$586 million credit facility provided by a number of banks with a Coface guarantee, conditioned on its 24 satellites being built by Thales Alenia Space. Besides the bank debt facility, Globalstar also received equity funding from its major shareholder Thermo Funding Company and issued convertible bonds in the amount of US$55 million.
An even larger debt package is currently structured for Iridium, which in June 2010 announced a US$1.8 billion debt facility guaranteed to 95% by Coface, equally due to the choice of Thales Alenia Space as prime manufacturer for its 72-satellite constellation NEXT.
Clearly, the ability to secure debt financing guarantees from an ECA can be tied to an operator’s choice of a satellite manufacturer. In the short term, this factor is likely to be at least as important as the quality of the technical and price offering from manufacturers.
Transactions also driven by some industry leaders
In parallel to equity and debt financing by ECAs, a significant part of the largest transactions in recent months have been conducted by leading satellite companies, totaling over US$1.3 billion. These include:
“the Viasat acquisition of Wildblue in 2009.
“the SES investment in O3B in November 2009.
“the Inmarsat acquisition of Segovia, a specialist in defense market software solutions.
“the ABS acquisition of satellite assets from Mabuhay and of two satellites of Koreasat.
“the Harris Corporation acquisition of CapRock in April 2010.
In addition, two satellites previously owned by ProtoStar were sold at bankruptcy auction last year to SES and Intelsat.
Interestingly, these transactions took part in widely varied segments of the satellite value chain, ranging from a vertically integrated provider of broadband access to a new satellite constellation and a satellite service provider.
Further financial transactions likely down the road
The economic rebound remains fragile, particularly in developed markets. However, economic growth in emerging regions and sustained demand for satellite services should support additional satellite projects. As a result, we should expect more transactions and the accompanying financing needs in the coming months.
While ECAs will continue to be involved in a large number of deals, some private funds might also become active again, either as they manage current investments or as they take new positions in the satellite sector. The role ECAs play in conditioning financing on where satellites will be built and launched could become a new factor in the industry, changing the playing field globally and prompting more governments to use financing guarantees to protect domestic businesses.
