Satellite Pioneer That Broadcast Moon Walk Now Groans Under DebtBy
Intelsat sold $1.25 billion of notes on Monday to buy time
Company has $15 billion debt load, high interest expenses
Intelsat SA, one of the world’s largest satellite operators, may have bought itself time to fix its debt problems. But it hasn’t made them go away.
The company sold $1.25 billion of secured notes on Monday, which will help give it more time while it tries to cut its total annual interest payments. It now has enough money to pay off debt maturing in 2018. But Intelsat, which has endured two leveraged buyouts, still has about $15 billion of borrowings. Its annual interest payments are big enough that analysts forecast it will barely eke out a profit this year. Dianne VanBeber, an Intelsat spokeswoman, declined to comment.
Having a high debt load may have raised few concerns in a different era, when selling satellite service to governments, companies and others was a steady business. Intelsat broadcast Neil Armstrong’s walk on the moon, and for years had little competition. But rivals have added vast amounts of satellite capacity in recent years, and the company’s revenue is under pressure.
After years of near-zero interest rates around the world, companies have more than $2.2 trillion of junk bonds outstanding, a figure that has more than doubled since the 2008 financial crisis. Now as corporate profit growth shows signs of slowing and the U.S. Federal Reserve raises rates, scores of junk-rated companies need to fix their liabilities. Valeant Pharmaceuticals International Inc. is in talks with its lenders to figure out how to placate them after it has delayed filing its earnings. Energy companies including SandRidge Energy Inc. and Goodrich Petroleum Corp. have missed debt payments and are in negotiations with lenders.
"For a lot of these companies there is no way out. A good chunk of the market is fundamentally flawed," said Margie Patel, a money manager for Wells Capital Management in Boston.
The issue with many companies is whether cutting their interest payments will allow them to get healthy again, or whether they are in a terminal state, however much debt they have. Many energy companies are in the latter category as the price of oil has plunged, which has made renegotiating their debt difficult.
In the case of Intelsat, competitors including Eutelsat Communications SA and SES SA are profitable in large part because they have lower debt loads. As Intelsat’s shares have fallen, Eutelsat’s and SES’s have remained stable.
Intelsat launched its first satellite in 1965, starting its life as an international consortium of governments. It became a private company in 2001. Since then, it has gone through two leveraged buyouts -- one led by a consortium including Apollo Global Management, and then another led by BC Partners Ltd. and Silver Lake, which still own 71 percent of the company. It also bought rival PanAmSat in 2006. Along the way, the debt kept piling up.
Company shares trade at $2.81 after touching $1.50 earlier this month, down from as high as $17.43 last year.
In the last few weeks, investors have grown increasingly sanguine about junk-rated companies. U.S. speculative grade companies’ bonds have taken back all of their losses for the year, and Western Digital Corp. announced plans to sell $5.6 billion of sub-investment-grade debt, the biggest offering of the year for a non-investment-grade corporation. Intelsat’s $1.25 billion bond deal was originally supposed to by $1 billion, but it increased because of strong demand from investors.
There are still also plenty of signs of distress for borrowers -- for example, the Bloomberg Bankruptcy Index has been creeping higher all year, and stands at its highest level since 2014, when Energy Future Holdings, also known as TXU, filed one of the biggest ever.
Time can help Intelsat, but can also hurt it. Intelsat’s revenue is likely to fall, thanks to new high-capacity satellites that the industry is embracing. In 2011, competitor ViaSat Inc. launched a satellite that could beam an iPod’s worth of data in a second, twice as much as the capacity of others in use at the time. Individual satellites that ViaSat hopes to put into orbit in the next few years could transmit as much data as the entire industry does right now. Intelsat this year launched a new satellite of its own, called "Epic." Competitors plan additional launches in the near future, which could lead to even more revenue pressure.
With capacity mushrooming, prices in the industry are falling, and with it Intelsat’s revenue. From 2009 through 2013, the company generated at least $2.5 billion of revenue every year, according to data compiled by Bloomberg. Last year, that figure fell to $2.35 billion, and the company expects somewhere around $2.14 billion to $2.2 billion in 2016.
"The whole industry, which has up till now moved at glacial rates, is going through a rapid change right now," said Chris Quilty, senior analyst at Raymond James. "There’s been an overwhelming flood of supply and the pricing has deteriorated at a rate the industry has never seen before."
The flood of capacity is painful for Intelsat. It has about $900 million of annual interest expenses now. The company expects to spend somewhere around $760 million on capital expenditure. Add the interest and capital costs up, and subtract out capitalized interest, and the result could be enough to wipe out most of the company’s expected earnings before interest, taxes, depreciation, and amortization.
Moody’s Investors Service said it expects free cash flow, a measure of cash flow from operations after necessary capital expenditure, to be negative for the company in 2016.
Intelsat’s bond offering, rated B1 by Moody’s Investors Service, should allow it to pay off its more than $400 million bond maturing in 2018 and minimize its reliance on its revolving line of credit, which matures next year.
The borrower for its 2018 issue is Intelsat Luxembourg, which is later in line to receive money from Intelsat’s operating assets. Another issue from that same unit, $2 billion of notes carrying a 7.75 percent coupon maturing in 2021, are trading at less than 30 cents on the dollar. That market price reflects investors’ expectations that bond holders will take some kind of loss on the debt.
“The new debt issuance is Intelsat’s first step” in fixing its debt issues, Standard & Poor’s analysts led by Michael Altberg wrote in a statement.
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