Dealing With The Credit Crisis
There has been plenty of gloom in the first months of 2008 stemming from the credit crisis born of the subprime mortgage meltdown and the end of easy and cheap debt financing that underpinned the highly leveraged private equity transactions that transformed the satellite sector starting in 2003. Nevertheless, a series of satellite industry transaction closings has demonstrated that the sector remains vital, is outperforming the transactional market, and that smarter and more patient dealmakers know that a new set of financial market conditions offers new opportunities.
When the credit crunch began last summer, many print and electronic media commentators asserted this meant the end of highly leveraged buyouts, the unavailability of debt financing — especially of low interest debt, the end of so-called “covenant-light” debt packages and the demise of payment-in-kind, or PIK notes. While those trends are broadly true, they are counterbalanced by other capital markets and trade movements.
For one, the U.S. Federal Reserve Bank, the country’s central bank and monetary policy maker, has embarked on what is likely to be a series of interest rate cuts that should loosen the availability of debt finance for a flight to quality. In other words, while easy credit for doubtful business plans may be harder to obtain, the capital on the sidelines will be all the more available for companies and business plans with traditional debt-to-equity ratios, financial covenants, debt service and guarantors.
Also, interest rate cuts weaken the already weak dollar. This is terrible news for U.S. tourists but good news for satellite industry exporters, whose prices are flattered compared to the euro, pound sterling and yen and whose products are therefore more competitive than non-U.S. manufactured products and services, whose costs are incurred and prices set in those currencies. This column previously has noted that the weakening dollar of the last few years has helped offset what would otherwise be a more obvious regulatory burden and competitive disadvantage imposed by the International Traffic in Arms Regulations of the U.S. State Department, the Sarbanes-Oxley Act of 2002 and other U.S. legislative and regulatory barriers.
Beyond those considerations, a close look at the economic data offers a mixed picture. As of this writing, at least, the March meltdown of investment banking firm Bear Stearns & Co. caused substantial capital markets volatility but not a sustained decline. The U.S. Federal Communications Commission’s 700 MHz auction closed and set records for spectrum licenses, arguably validating some of the spectrum-based valuations given to mobile satellite service (MSS) providers whose key assets are those licenses.
The MSS business plans themselves continue to develop in the face of market turmoil, with several of the players completing new financing rounds. The near pan-MSS sector investment by Harbinger Capital Partners is an interesting development for the satellite sector. Harbinger’s investment with Echostar Corp. of $300 million in MSS operator Terrestar and contribution of L-band spectrum indicates deals are getting done in the current climate — at least in this case — even with supposedly discredited PIK notes.
In the same time period, the Loral-Telesat and Intelsat-BC Partners transactions closed, continuing the consolidation of the fixed satellite service (FSS) sector. Both deals were committed before the credit crisis began, and therefore are not necessarily bellwethers of transactional viability in the new climate. But the pre-closing debt package revisions in the Intelsat deal were not extreme and may be further proof that quality transactions may not be harmed, and may even be facilitated, in a tighter credit market as investors more critically separate the wheat from the chaff.
In addition to demonstrations of FSS and MSS sector vitality, rapid service offering and technological developments are driving the broadband, Earth imaging and turnkey network solutions sectors. The exploration of the satellite broadband market and its fit, complement and competition points with terrestrial broadband service is going to be one of the main stories of the second half of this decade. On the manufacturing side, there have been several interesting transactions in the small-satellite and subsystems industries.
Throughout the rest of the year, this column is going to focus intermittently on several of these often-less-reported-upon subsectors. The message: the credit market may be in turmoil, but this is not 2001-2002. The satellite sector is thriving.