Satellite Financing: The Rules And The Rituals
By Theresa Foley
The ranks of bankers and finance professionals involved in the satellite industry have multiplied in the last few years to match the need for investment to build new satellite systems. In 2002, the dance between the banks and the operators may be a bit more conservative than the wild gyrations of a few years ago, when practically anyone with a good idea could get funded. However, a more mature satellite finance sector, with lots of new names, is proving itself able to tap into billions of dollars for satellites. Here is Via Satellite’s guide to the courting ritual.
The most active banks of the ’90s have been joined by European-based global banks as the attraction to satellite financing swells. This development follows a decade in which a smaller group of bankers helped raise tens of billions of dollars for satellite operators and earned hundreds of millions of dollars in fees. Familiar names, like Merrill Lynch, Morgan Stanley and Bear Stearns, have been joined by a longer list of banks including Deutsche Bank, UBS Warburg, S.G. Cowen, Credit Lyonnais and BNP Paribas, which have taken more prominent roles in the biggest satellite deals.
At the same time, other financial firms have backed away, part of the toll exacted as billions of dollars were lost by the mobile satellite sector in the late ’90s. The most visible example is J.P. Morgan Chase and Co., which is leading 18 banks who are plaintiffs in a suit against Motorola, the sponsor of Iridium. The banks claim they were deceived into lending $800 million to the project. Chase had a significant satellite financing practice in the mid-’90s, hitching its wagon to Motorola and Iridium, but has disassembled its team in the wake of the Iridium collapse. “Some of the investment banks think it’s a difficult industry, and some of their analysts find it difficult to know how to follow it,” says Phillip Spector, an attorney with Paul, Weiss, Rifkind, Wharton and Garrison, who says satellites carry a higher perception of risk than a few years ago.
Other banks whose interest in satellites have shifted include ING Barings, which sold much of its investment banking division to ABN Amro, and Bank of America, which has been a key lender to Loral. ING led two Inmarsat transactions and had an underwriting role for SES Global last year from its Amsterdam-based banking operations, but the group of satellite finance analysts and managers who worked on satellites from New York in the ’90’s has been disbanded.
The Courtship Rules
Competition to win the job of lead manager in satellite financing is intense. Against this backdrop, global investment bank Lehman Brothers structured a vehicle through its Merchant Bank limited partnership, to acquire large pieces of equity in Eutelsat and the other former intergovernmental satellite organizations in November. Lehman paid U.S.$490 million to Telecom Italia for 21 percent of Eutelsat; three percent of Intelsat; two percent of Inmarsat; and four percent of New Skies Satellites. Lehman has advised Intelsat on its privatization for the last few years, and others speculate that this close involvement, plus the investment, positions Lehman well to act as leader on Intelsat and Eutelsat IPOs.
But Ed Zughaft, Lehman managing director, said the investment is aimed at making money. “Our history and experience in the satellite sector gave us as an institution a lot of comfort that this was going to be a good investment. It allowed us the opportunity to structure a win-win for Telecom Italia, letting them monetize a non-core asset and allowing us to make an attractive investment,” he says.
With 10 people dedicated to satellite full-time and 20 assigned to work on satellites part time, Lehman has raised $12 billion in 26 satellite deals since 1998. Lehman was very active in satellite financing in 2001, leading the financing for Intelsat’s $1 billion credit facility that closed in March 2001, along with Citibank/Salomon Smith Barney. Eight other banks had a secondary role. Lehman also co-managed a $927 million Loral Cyberstar debt exchange in Fall 2001. Cyberstar notes were exchanged for other notes worth 70 to 75 percent of their value. The exchange should save Loral $43 million annually in interest payments. Lehman has also led block trades of stock for Sirius, the DARS venture, raising $250 million in 2001 and $158 million in early 2002 for the company.
Bank mergers also have contributed to the new rivalries for the coveted position of lead manager on satellite deals. Credit Suisse First Boston and UBS Warburg are now commonly heard names in satellite deals, taking the spot held for many years by Donaldson, Lufkin and Jenrette. CSFB acquired DLJ in August 2000, and with it, a satellite finance team that includes DLJ veterans Dan Flatley, Hoyt Davidson and Tracy Mehr. Meanwhile, Swiss-based UBS bought Warburg and PaineWebber, and in 2001 brought another old DLJ hand, Steve Ketchum, aboard to lead a satellite group.
UBS, with $1.5 trillion in assets under management, has five full-time satellite professionals and can tap another 50 finance experts as needed. UBS’ expertise on satellites is drawn from DLJ’s preeminent role in the 1990s. “DLJ invented the satellite finance industry,” Ketchum says. “It was the first bank to have a dedicated satellite finance business, financing Panamsat early on,” and went on to do more satellite transactions than any group on Wall Street.
Building on the leadership position of DLJ’s satellite banking franchise, which it acquired in 2000, CSFB continues to be one of the premier satellite banking forces on Wall Street. It uses the DLJ statistics–65 offerings completed for satellite-related companies in the last eight years, raising more than $26 billion–to claim the top position in satellite financing. The institution’s “pitch sheets” place CSFB in the number one position for total capital raised, high yield debt, IPOs, strategic merger and acquisition (M&A) advisory roles and satellite restructurings with a 68 percent market share of satellite financings. CSFB has eight professionals in its satellite group in New York, with five senior bankers dedicated full-time to the satellite area.
While CSFB and UBS compete, clients like Echostar are using both. Most recently, to support Echostar’s $28-billion bid for Hughes last year, CSFB underwrote half of the $5.5 billion Echostar bridge loan needed to win GM’s acceptance of the Echostar offer. UBS Warburg also had a role advising Echostar, but decided against a bridge loan to help Echostar close the deal. In an illustration of just how important the satellite business has become, the UBS chief who made the call was sacked shortly afterwards. The bank says the firing was for reasons unrelated to the unconsummated loan, although unofficial speculation connected the two events.
Like UBS, S.G. Cowen, the wholly owned investment banking unit of Société Générale of France, last year put together a satellite finance team by hiring veterans of the trade. Manish Thakur, a banker formerly with Merrill Lynch, and Rob Kaimowitz, an analyst who had worked at ING Barings and Unterberg, Towbin in the ’90s, are among Cowen’s dedicated satellite finance team in New York.
Thakur says S.G. Cowen was motivated to pursue satellite deals by the “revival in the satellite finance, as well as the strategic fit with the firm’s historic lending practice in this sector. This timing was one of seeing an opportunity.” Its clients in lending and investment banking in 2001 included SES Astra, Raytheon, Northrop Grumman, Terion, L-3 Communications, Intelsat, Inmarsat, Tenzing and Space Imaging. The bank has a high degree of comfort with satellite financing given its long history in France, where companies like Alcatel, Arianespace and EADS have emerged as leading global space players.
Sharing The Wealth
As more banks are drawn to satellite financing, the amount of work is growing, with satellite operators engaging in ever-larger M&A deals, loans and other offerings. At times, more banks will be brought into a transaction than may be necessary as part of an operator’s strategy to gain the allegiance of all the banks for more complex financings later. The more money needed in a debt offering or loan–these days billions of dollars is a common figure for a single deal–the more banks necessary to spread the risk. The banks typically will syndicate (or resell) the loan in smaller pieces to distribute the risk.
The biggest deal of 2001, Société Européenne des Satellites’ (SES Global) acquisition of GE Americom, had the participation of 49 banks. Those in the lead–Deutsche Bank, Dresdner Bank and Morgan Stanley–had advised SES on its 1998 IPO. They were supported by a secondary tier of senior arrangers that included more than 15 banks, each with around $100 million commitment to the deal. These included ABN Amro, Bank of Tokyo, BNP Paribas, Credit Lyonnais, Fleet National, HSBC and Société Generale.
SES Chief Financial Officer Jurgen Schulte says that even with such a large number of banks, the transaction was managed and coordinated efficiently. Why 47? SES called in all its long-term relationships. Over 10 years of satellite financing had given SES a strong level of understanding within some 30-35 European banks. SES had credibility in the lenders’ eyes, Schulte says, “allowing us to get the syndicate together and fully placed within a period of four to six weeks.”
David Arlettaz, a banker at BNP Paribas, says the loans for the SES-GE deal have sold very well in Europe’s secondary market, showing that this operator is perceived as a good risk for lenders. BNP Paribas, a leading European bank with a presence in Asia and the United States with more than $650 billion in assets, began financing satellites in the early ’90s. Arlettaz is one of five professionals with part-time responsibility for satellites, out of 70 working on media and telecoms.
BNP Paribas has a good position with European operators, as well as in other regions, with a client list that includes Hispasat, SES Global, Inmarsat, Star One, Eutelsat, Spacecom and IPstar. BNP Paribas sometimes sees the lead position on a satellite deal going to competing banks. But Arlettaz says that in satellite deals, a secondary position can be a good one, placing a bank in the core group for an operator and making it a contender for a lead role later. With seven satellite deals done in 2001, BNP Paribas has a long- term interest in satellites as it closely monitors how well clients like SES do in executing their plans for activities like the acquisition of Americom. “We will take an observer’s seat for six months and see how the two companies integrate. Making two companies into one is never easy,” Arlettaz says.
Deutsche Banc (aka Deutsche Banc Alex. Brown), a European-based global bank, was one of SES’ advisors on the GE deal and also advised Echostar on its $28 billion offer to buy Hughes, plus provided a $2.75 billion bridge loan commitment. Deutsche Bank continues its advisory role with Echostar for future strategic capital raising, and was a joint lead on a $700 million high yield offering in December. Another bank that grew in the ’90s, Deutsche Bank acquired Morgan Grenfell and Bankers Trust and set up a satellite practice early in the decade. Managing Director Robert Landis says the BT acquisition two years ago rounded out the bank’s capabilities in M&A, leveraged finance and equity capital markets, expanding the bank’s already strong debt capital market expertise. In 2001, the satellite team added Karim Zia, a research analyst who had been at CSFB. Deutsche Bank’s 20-25 full-time staff working on satellite finance is supported by another 50-60 experts who are tapped as needed on a geographic or product basis. Deutsche Bank is increasingly involved with satellite and launch manufacturers. The bank has done work for many of the U.S. satellite companies, which Landis says is key to understanding the dynamics and trends of the industry.
Another of SES’s banks was Credit Lyonnais, headquartered in Paris, which has worked in satellite finance for more than 25 years. The bank has four full-time satellite professionals and a total team of 25 persons involved in the satellite industry. Among its clients are Eutelsat, New Skies, Asiasat, Thuraya, TeSam, Globalstar, Arianespace Finance, Sirius Radio and Nilesat. Credit Lyonnais has played a prominent role in financings, totaling $8.2 billion for satellite clients since 1998.
If it closes in 2002, the Echostar-Hughes deal likely will be the biggest satellite financing this year, and like the SES-GE one, involved many banks. In addition to Merrill and Bear advising GM, Hughes was represented by Goldman Sachs and CSFB. Among others, Echostar used Deutsche Bank and CSFB to make the bridge loans to help the deal close.
Merrill Lynch, with assets of more than $1.5 trillion, claims to be the biggest underwriter of debt and equity offerings in the world. This distinction has helped it to hold a seat at the table at nearly all the biggest satellite financings. On the SES deal, it advised GE, and on the Echostar M&A, it is General Motors’ advisor. Among many other clients, the bank also advises Craig McCaw’s investment company, Eagle River, on the restructuring of ICO.
When satellite stocks were few in number, Merrill led the way in creating research coverage for the sector by appointing Tom Watts as its leading analyst for satellites in the mid-’90s. The firm became the first of about a dozen banks to cover satellites as a sector in its own right. For a time, Watts held the top ranking among institutional investors for satellite coverage. He later would depart the satellite work to cover Internet infrastructure companies, but not before breaking ground for the generation of equity research analysts that have served the satellite financing community for the last five years. Their ranking by institutional investors is a competitive point the banks like to use as they jockey to win the role of lead manager for satellite IPOs. The current satellite analyst at Merrill, Marc Nabi, now holds the top ranking, according to the Institutional Investor 2001 poll, followed by CSFB’s Ty Carmichael, Jr.; Morgan Stanley’s Vijay Jayant; and Solomon Smith Barney’s Armand Musey.
Omar Jaffrey, Merrill managing director, global markets and investment banking, says Merrill’s research ranking, along with its global sales force and ability to distribute an offering very broadly in markets, give it a competitive edge. “In sales, the distribution Merrill Lynch has in debt and equity is second to none,” Jaffrey says. “Having a person that has the number one voice means when we go out to sell a security or do an M&A deal, investors turn to our guy and then listen. It helps us get our deals done.” He points to 2000, the last year when any satellite IPOs came to market, as proof. Merrill led four of the five transactions that year, helping to raise $2.3 billion of a total $2.5 billion.
With their reports, the analysts are able to move stock prices, at least temporarily, and over the long term, their promotion of or skepticism towards a company or service can sink into the investor mindset. Banking managers also have strong influence, and while most of the hundreds of people involved in satellite financings come and go, a core group of specialists has stuck with satellites for five years or longer now, showing personal commitment and developing a deep expertise in the industry. They include Jaffrey; the CSFB team of Davidson, Flatley and Mehr; UBS’ Ketchum; S.G. Cowen’s Thakur and its analyst Rob Kaimowitz; Landis of Deutsche Bank; and Gilles Gantois of Credit Lyonnais.
Choosing A Partner
Experience does count, but a specific bank is usually awarded a lead role based more on what has to get done than on who is heading a finance group, says Peter Nesgos, an attorney with Milbank, Tweed, Hadley and McCloy in New York. Nesgos has helped in the legal end of negotiating dozens of satellite financing deals.
“If you are working on a major international equity offering, you will need major players like Goldman Sachs, Morgan Stanley, Lehman Brothers or Merrill Lynch as major underwriters. They have a recognized execution ability and a global reach. You also will need a lot of support if your offering is in the billion dollar plus range,” Nesgos says. “If you are doing a debt offering, particularly high yield, the banks with the best experience are CSFB, Bear Stearns and UBS Warburg. In terms of industry experience and institutional bank standing, then you would look at Salomon Smith Barney, S.G. Cowen, J.P. Morgan Chase, Credit Lyonnais, BNP Paribas or Deutsche Bank.”
The Road Ahead
With 2002 well under way, the satellite financing community expects trends like consolidation to continue in launch and satellite manufacturing and in Fixed Satellite Services. Eutelsat is expected to make a U.S. acquisition, meaning that like SES, it will need more bank support on both sides of the Atlantic. “Both are doing next generation broadband applications,” says Arlettaz. “If one decides to aggressively develop that type of service, the other is likely to follow suit.” Both are expected to pursue South American diversification strategies that will bring growth and require financing.
New financing opportunities will take hold if and when the long-awaited initial public stock offerings by newly privatized former IGOs, plus secondary stock offerings from other FSS players, move ahead. Privately-held equity in Intelsat and the other IGOs could be sold this year, as it was in 2000-2001 when Lockheed Martin and Lehman Brothers bought equity from Comsat and Telecom Italia, respectively. More such transactions could give a clearer idea of the market value of those operators.
The markets may not be ready to move beyond financing established operators this year to return to funding riskier entrepreneurial ideas. But if the digital satellite radio ventures, XM Radio and Sirius, turn out to be winners, it could unlock new investment sources for unproven satellite applications, Nesgos says.
Globalization of the satellite operators will also affect the banks. SES, for example, will expand its banking team as it grows in new regions. Large dollar transactions will stay with the banks SES has used for years, but the global operator also “will add three to four banks that will play as important a role as these banks,” Schulte says.
Other European banks, such as Barclays and ING, have teams of professionals assigned to bring in satellite business and serve the satellite industry, and they stand to gain along with the larger players. Barclays, based in the United Kingdom, handles satellite financing within its 20-person strong Telecom, Media and Technology group in London. Barclays, which focuses on debt financing, has been involved in satellite financing for more than 10 years and has been the mandated lead arranger on transactions totaling more than $1.5 billion in the last 18 months. ING, headquartered in the Netherlands, has a satellite finance team in Amsterdam that focuses on commercial banking and M&A advisory services. The team includes 25 people, four of whom are full-time satellite specialists.
The bad investments in mobile satellite projects in the late ’90s for the most part have done no lasting or visible damage to the firms that are helping to finance satellites, or so the bankers say.
Deutsche Bank advised ICO as the mobile satellite company prepared to raise bank financing and had a minor position in Iridium. Landis says that prudent risk management protects the banks. As is typical in the industry, loans and debt offerings are syndicated to spread the risk but, Landis says, “banks have reassessed at what point is [a satellite business plan] venture capital risk and at what point is it a risk for the capital markets.” Venture capitalists expect significantly higher returns of 40 percent or more on their money with a commensurate degree of risk, while bank and debt markets typically require an 18 to 25 percent return on capital and a higher degree of assurance that they’ll be repaid.
Nor was Merrill Lynch, which took Iridium public and helped it with other equity offerings, hurt by the Iridium collapse. “We don’t have any exposure,” Jaffrey says. Only banks that made direct loans for Iridium were hurt. “Parts of the satellite industry like Iridium, ICO and Globalstar were business plan stories and as speculative as you can imagine. It was venture capital on the grandest scale,” Jaffrey says of these companies. “When investors choose to participate in venture capital opportunities, some work great like Charlie Ergen’s company Echostar. Others don’t work so well….None of that hurts us as intermediaries. Our job is to provide information, show the upside and downside, and let investors make their judgments.”
Balancing those two conflicting pressures, conservatism and the willingness to take risks in an industry that has never been one for the faint hearted, may be the most delicate task the bankers face as they try to raise billions of dollars in new investments in satellite projects in 2002.
Theresa Foley is Via Satellite’s senior contributing editor.