Investment Bankers See Healthy Long-Term Financing Environment for Satellite

Industry lawyers and bankers compared notes on the satellite sector’s 2010 performance during Monday’s “Financial State of the Industry — Market Trends and Observations” session at SATELLITE 2011, coming to a positive consensus that the industry has returned to a state of financial normalcy.
    Futron COO Peggy Slye, who moderated the panel, opened the session by giving the audience a bird’s eye view of ongoing growth indicators in major industry sectors. “The major global C- and Ku-band operators maintained their ownership positions in 2010, with additional fragmentation due to the success of regional operators,” said Slye. “Additionally, Futron projects a spike in new capacity happening in 2013, as a large number of new satellites, including Ka-band, are launched by the major operators. The available capacity will be much higher than the demand for some time, however, the gap between supply and demand will converge in 2019.”
    White and Case Counsel Maury Mechanick kicked off the panel discussion with a topic that has generated heated debate in the industry — the future of the MSS sector. “I call it the MSS mess,” he said. “This year is like déjà vu all over again. We hope to realize who will control the rights to the S-band spectrum, as nobody really knows at this point. We also ask ourselves how many companies will be involved in the sector at the end of the year and whether or not a single company, like Harbinger Capital, will be permitted to control S-band and L-band in the United States.”
     Mechanick, who cited Harbinger’s plans to acquire bankrupt spectrum holders Terrastar and DBSD, also sparked a debate about the MSS industry’s sustainability as a stand-alone business, since many of the business models depend on having fewer players in the market. “My prediction is that MSS satellites will wind up in the hands of the major cellular operators, where the governing metric is competitive advantage. I think this is the best thing that could happen. The cellular industry is making $60 billion a year and when they see ATC spectrum as a small, but worthwhile, investment the spectrum will be incorporated into their cellular infrastructure. It’s a result that would work best for the American people.”
    Watts Capital Partners President and CIO Thomas Watts agreed with Mechanick’s MSS assessment. “S-band will likely fall into the hands of cellphone operators. There are trends that will continue to make bandwidth investments attractive, including: digital media and continued media migration to the net, cloud computing, the mobility critical market, M2M communications becoming a reality and the intensive security and emergency response capabilities,” said Watts. “The beneficiaries here will be the bandwidth owners, aggregators and the providers of low-cost network connections to ubiquitous computing devices.”
    BNP Paribas Senior Banker and Managing Director Philippe-Olivier Rousseau disagreed with the perceived long-term MSS instability and focused on positive predictions for the FSS sector, which received unanimous praise from the panel members for its stability. “This year should provide a new edge for the satellite industry. Financing markets are quite attractive. Leveraged buyout [private equity] markets are back on track, and the ECA financing market, which has been a crucial element to satellite’s success in recent years, remains healthy. Debt capital markets are back at spring 2008 levels, and we believe that they will stay there.”
    Rousseau noted that satellite mergers and acquisitions activity and private equity sponsorship levels in 2010 were identical to 2004 levels. He also said that import-export credit financing is playing an increasingly important role in future greenfield projects.
    “There was a triple-play in December with import-export financiers playing major roles in Inmarsat, SES and Hispasat investments. The pricing is just too attractive. With today’s cap-ex cycle at a 15-year period, import-export financing fits nicely with the long-term debt and maturity financing needs in the satellite industry. This is also the reason why private equity sponsors love the satellite industry,” Rousseau said. “However, while developments of satellite broadband Internet and mobile services might become the new frontier, it also includes risks and uncertainties. But debt capital markets should remain attractive as well as the cost of equity capital in emerging countries like Asia and the continuous support from ECAs.
    Milbank, Tweed, Hadley & McCloy Partner Dara Panahy said that all four of the major FSS operators turned in solid full-year results in 2010, which helped steady the industry for an expected growth year. “Intelsat has a solid year and is poised for growth with new satellites. SES ended 2010 strong through its consolidation of activities and its reduction of reduced operating costs. Its investment in O3b should position it well in the long-term. Eutelsat was steady and consistent, with high utilization rates being a key characteristic of their performance, combined with their comprehensive credit refinancing of 1.3 billion euros. Telesat also has a high utilization rate with a strong cap-ex program on three satellites, which puts them in a solid position entering a possible company sell-off,” he said.
    Panahy reviewed a very strong year in 2010 for satellite manufacturers, which received a combined 29 orders. Commercial launch service providers performed 24 missions last year, and 25 commercial launch contracts were signed, including ones by emerging competitor SpaceX.
“There’s no question that there’s continued resilience across key commercial space industry sectors. Satellite has weathered the economic downfall well. With the gradual recovery of the consumer economy, capital markets financing and strategic merger and acquisition activity will continue to pick up at the speed it has increased over the past two years,” he said.
    Mechanick addressed concerns in the U.S. broadband market caused by the government’s lack of satellite involvement in the Obama administration and the U.S. Federal Communications Commission’s (FCC) National Broadband Plan. “Last year, I was at this conference talking about how difficult it was for satellite to gain respect as a viable solution for the broadband. This year, there is not a whole lot of good news,” said Mechanick. “The FCC continues to marginalize and ignore the role of satellites for national broadband deployment in the National Broadband Plan. It is actually written into the plan that satellite is well-suited and able to deliver the required speeds, followed by a list of lame excuses why it remains to be a small portion of the national infrastructure investment.”
    While Mechanick expressed frustration in the government wasting its potential resource, he pointed to a FCC Notice of Inquiry, “Improving Communications for Native Nations, CG Docket No. 11-41,” issued March 8, which contained much different language regarding satellite. “This document may provide a glimmer of hope for satellite.  The FCC acknowledges and praises satellite’s effectiveness and viability in connecting unserved areas. I read this and wondered if the people who wrote the Native Nations Plan and the National Broadband Plan were on the same planet.”