Satmex initiates new satellite project with US$2m down payment

Beleaguered Mexican satellite operator Satmex has paid Space Systems Loral US$2m for an Authorisation to Proceed with the construction of a new satellite, Satmex-8.
According to a Satmex SEC filing, the operator entered into the agreement with SS/L on…

Beleaguered Mexican satellite operator Satmex has paid Space Systems Loral US$2m for an Authorisation to Proceed with the construction of a new satellite, Satmex-8.

According to a Satmex SEC filing, the operator entered into the agreement with SS/L on April 1, and SS/L will now perform a number of engineering and development tasks over a period up to sixty days.

Satmex hopes to be in a position to enter into a definitive construction agreement during that period. If no such agreement is possible, the ATP will be terminated and no further payments will be made.

If a definitive agreement and subsequent first payment is made prior to April 22, SS/L will provide the satellite within 27 months of that date. Even if the agreement is not made by that time, Satmex-8 would be manufactured in time to launch at some point in the third or fourth quarter of 2012.

The spacecraft is intended to replace Satmex-5 at, which suffered a propulsion system failure in January this year. It now has just two and a half years of remaining life, hence the need for a replacement at its 116.8W orbital slot as soon as possible.

Satmex-8 will be based on SS/L’s existing 1300 model, and will have similar specifications to Satmex-5 and Satmex-6, the company’s most recent satellite.

The total cost of the project is estimated at US$350m. If the desired contract is signed, Satmex will have to make initial payments totalling approximately US$65m over the next five months.

In its filing, Satmex states that the payments necessary under any definitive construction agreement exceed the level of expenditure to which the company can commit under the indentures governing its debt – specifically, the US$238.2m First Priority Senior Secured Notes which mature in 2011 and the US$175m Second Priority Senior Secured Notes due 2013.

Satmex is seeking a waiver on certain indentured covenants from the holders of these notes in order to enter into the construction agreement for Satmex-8.

A group of holders of more than 55% of the Second Priority Notes blocked a recent attempt by US operator EchoStar to acquire Satmex. At the time, a committee representing this group stated that it was open to alternative proposals, including a refinancing that provide a degree of recompense to Satmex bondholders and financing for a new satellite.

The precarious position Satmex finds itself in is reflected in the following passage from the filing: “There can be no assurance that Satmex will be able to negotiate a definitive construction agreement with SS/L for Satmex 8 or that it will be able to enter into an agreement for the launch of Satmex 8, on reasonable terms or at all, or that Satmex will be able to obtain the waivers of certain indenture covenants to enter into either agreement.

“If Satmex is unable to negotiate and execute a definitive construction agreement for Satmex 8 with SS/L prior to the end of the ATP Term, Satmex’s ability to provide seamless satellite service to its customers may be affected.”

Satmex previously entered into an agreement with SS/L in 2008 for the construction of Satmex-7. Following an initial payment of US$4m, no further funds have been allocated to that project.