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Loral Looks Beyond Bankruptcy

By | July 21, 2003

      Loral Space and Communications [NYSE: LOR] agreed last week to sell arguably its most precious assets and to enter Chapter 11 bankruptcy-court protection for the chance of emerging from the proceedings with a viable business still intact.

      Loral’s voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code will include a request for court approval to sell the company’s six North American satellites and orbital slots for at least $1 billion to rival Intelsat Ltd. The sale would occur at the conclusion of an auction process required under the U.S. bankruptcy code but no obstacles are foreseen that would block the Intelsat deal, Bernard L. Schwartz, chairman and chief executive officer of Loral, said during a telephone interview with SATELLITE NEWS.

      The transaction fits important needs for Loral and Intelsat, Schwartz said. Loral would gain at least $1 billion in cash through the sale of its North American assets. Intelsat would fill a void in its operation that existed because it was prevented by the Federal Communications Commission (FCC) from providing satellite services to the U.S. market prior to the former intergovernmental satellite organization’s July 2001 privatization.

      Intelsat’s purchase of four in-orbit and two under-construction Loral satellites will be subject to regulatory approvals and the satisfaction of other conditions. The transaction also requires approval by Intelsat shareholders.

      The Chapter 11 filing in the U.S. Bankruptcy Court for the Southern District of New York is intended to let Loral complete its deal with Intelsat “free and clear of any encumbrances,” Loral officials said.

      Loral expects to use most of the proceeds from the roughly $1 billion sale of the North American satellites to repay all $959 million of its outstanding secured bank debt. The transaction likely would close within four to six months, pending bankruptcy court and regulatory approval, Loral officials said. The bankruptcy process itself could take a year or longer to complete, they added.

      Loral Skynet, a satellite services subsidiary of Loral, will continue to operate its integrated fixed satellite and network services business with the five telecommunications satellites that remain after the sale of the six North American satellites and orbital slots to Intelsat. Loral Skynet also will continue operating its established VSAT/fiber global network infrastructure without interruption to the company’s customers.

      If Loral completes the sale of its North American satellite assets to Intelsat as planned, Loral Skynet’s remaining fleet would consist of the Telstar 10, 11 and 12 satellites currently in orbit, along with the yet-to-be launched Telstar 18/Apstar V and Telstar 14/Estrela do Sul satellites. The latter two spacecraft are scheduled for launch within the next nine months.

      The holdover fleet of five Loral Skynet satellites serves markets in South America, Europe and Asia. Schwartz said those markets currently are underserved and offer strong potential for growth.

      Aside from the five satellites and orbital slots Loral would retain outside the North America region, the company will continue to own and to operate its satellite manufacturing arm, Space Systems/Loral (SS/L), one of only five such manufacturers in the world. However, a dearth of commercial and government satellite orders is plaguing all the industry manufacturers worldwide.

      In addition, Loral Skynet has been its parent company’s cash cow and possibly the best part of the subsidiary’s business is the North American satellites and orbital slots that Loral has agreed to sell to Intelsat. Those North American satellite assets have helped Loral Skynet mightily in generating strong cash flow and EBITDA (earnings before interest, taxes, depreciation and amortization) performance.

      Steve Symonds, a satellite consultant based in Wilton, Conn., said, “The one indisputable fact about this deal is that it’s a continuation of the consolidation that’s been underway in the commercial satellite industry for the past three or four years. This is surely going to increase pressure on the regional players to ‘marry up’ with one of the global, 800-pound gorillas or run the risk of having their market share whittled away to nothing by the global operators.”

      “Overall, this sale leaves Loral in a very weak position,” said Roger Rusch, president of the Palos Verdes, Calif.-based TelAstra satellite-consulting firm. “There are few remaining service assets to generate revenue and few satellite buying customers that would be willing to purchase satellites from a company in bankruptcy that is in feeble condition. It seems to be a case that Loral is selling off the assets in an attempt to survive, but they may have ‘eaten the seed corn.’ Completing construction of the remaining satellites will be a costly business since there are few programs to carry the overhead. I very much doubt that any vestige of Loral will remain in a few years.”

      To the contrary, Schwartz said the bankruptcy proceeding and the asset sale would allow Loral to emerge with a chance to reap the benefits of a satellite market recovery that inevitably will occur. The unquestioned need for replacement satellites will help restore the now-weak demand for manufacturing services, he explained.

      Schwartz said that he deeply regretted the impact a Chapter 11 filing would have on company shareholders who have been “patient and loyal” during turbulent times in the satellite industry. However, the company’s senior management reluctantly concluded that the asset sale and debt reduction only could be achieved through the Chapter 11 reorganization process.

      “We intend to move through this process as quickly as possible.”

      Loral’s principal challenge has been to overcome the effects of a prolonged economic downturn that led to a lack of satellite manufacturing orders across the industry and a slowdown in growth of fixed satellite services (FSS), Schwartz said.

      Cash on hand and cash flow from operations at Loral are sufficient to continue normal operations and customer support, company officials said. Accordingly, Loral will not obtain third-party, debtor-in-possession (DIP) financing at this time and instead will continue to evaluate its liquidity needs on an ongoing basis.

      “We have sufficient cash flow in the company to move forward,” Schwartz said.

      However, Schwartz declined to project how long that cash might last if the current industry-wide downturn continues.

      Loral has been savvy about managing its debt during the past couple of years to stave off bankruptcy. Without the need to protect Intelsat from potential claims by Loral creditors that might arise from the asset sale, Loral may have been able to delay its bankruptcy filing in hopes of buying time for the industry downturn to reverse.

      Last week’s actions are the latest steps that Loral has taken to ensure it remains in business. Loral announced on June 30 that it had collected $55 million in cash from Intelsat through an early payment of a receivable for agreed-upon orbital performance payments. Separately, Loral also announced on June 30 that it had reached a settlement with Alcatel Space to resolve all outstanding issues between them stemming from a contract dispute that had been in arbitration.

      Overcapacity Woes

      The moves by Loral last week follow a confluence of events that have severely affected its financial performance in recent years.

      Onerous obstacles faced by Loral, according to its officials, include:

      • Overcapacity in the existing global satellite universe that created a severe drought in new satellite orders;
      • A collapse of the capital markets that hampered the ability of many Loral customers to raise capital for planned projects and hindered the company’s own plans to raise capital; and
      • Significant reductions in FSS demand from telecommunications providers, particularly from Internet-related companies.

      Plans to substantially reduce long-term debt and interest expense should help Loral address concerns from customers and suppliers about the company’s financial condition.

      Loral has been hamstrung with an enormous debt load that consists of approximately $2.1 billion in long-term debt, including the $959 million of bank debt that Loral plans to pay off with the $1 billion in proceeds from its asset sale to Intelsat. The debt was amassed mainly from Loral’s ill-fated investment in now bankrupt Globalstar, as well as the rapid build-up of Loral Skynet’s 11-satellite FSS fleet.

      “Our investment in the North American fleet yielded an attractive return,” Schwartz said. “At the same time, we are encouraged about the prospects for the FSS fleet that will remain after the sale is completed. In particular, we believe our markets in South America and Asia are under-served and have growth potential.”

      However, Wilton, Conn.-based PanAmSat [Nasdaq: SPOT] President and CEO Joseph Wright has a different view of the Latin American and Asian markets. In a conference call with Wall Street analysts last week, Wright acknowledged that PanAmSat’s second-quarter 2003 financial performance was hurt by weak demand for satellite services in Latin America and Asia.

      “Joe was talking about his experience and I believe him,” Schwartz explained. “Our fleet has stabilized revenue and backlog and has not deteriorated over the last six months.”

      Latin America and Asian are in “developing regions” of the world that have less competition from terrestrial infrastructure than in the “very competitive” and much “more mature” North American market, Schwartz said.

      “By getting into those markets early, we will have infrastructure set up to exploit those opportunities,” Schwartz said.

      Doubters about Loral’s capability to develop a successful satellite services business outside of North America should consider that Loral Skynet began with its first FSS satellite five years ago and managed to build that business into a “very profitable” 10-spacecraft fleet that produces “very positive” cash flow, Schwartz said.

      Schwartz also tried to put the best spin possible on the potential value of Space Systems/Loral, despite depressed demand for its manufacturing services and the unlikelihood that its industry peers would want to buy the operation amid widespread overcapacity. He characterized Space Systems/Loral as an “attractive asset” at a time when the satellite manufacturing industry worldwide is poised for consolidation and is receiving early indications of an upturn in new orders.

      Intelsat helped to ease the financial pain by ordering a satellite last week from Space Systems/Loral. The win of the new satellite order from Intelsat marked the manufacturer’s first such contract in almost 17 months.

      Space Systems/Loral also recently was awarded a $113 million contract to provide batteries and power systems for the International Space Station. Earlier this year, WildBlue Communications Corp., of Denver, Colo., asked Space Systems/Loral to resume construction of its WildBlue-1 satellite project.

      The objective for Space Systems/ Loral is to move forward as an integrated, ongoing concern, aided by the financial resources it needs to grow, Schwartz said.

      One of the benefits of the Chapter 11 process is that the company’s obligations to customers and suppliers made after the filing are treated more favorably under the bankruptcy code than similar obligations made before the filing, Schwartz said. That situation should ease the concerns of customers and suppliers that may have been reluctant to do business with Loral in the recent past.

      “It is obvious that satellite manufacturing assets right now are breathing very hard,” Schwartz said. “It is a very difficult environment.”

      Now is a challenging time to be in the satellite manufacturing business, but “today will become yesterday very quickly,” Schwartz said.

      An edge for Space Systems/Loral is that it produces satellites whose quality ranks among the best in the manufacturing business, Schwartz said.

      A big concern for Space Systems/ Loral, however, is that it is “running out of backlog,” Schwartz said. The business unit clearly has had financial difficulty and has responded by cutting costs.

      “Unfortunately, Space Systems/Loral needs an investment for working capital,” Schwartz said. The company’s inability to replenish its dwindling backlog with new orders leaves a financial hole.

      “We would like not to sell the company,” Schwartz said. The biggest problem may be the uncertainty about when slack demand for new satellites will subside and new orders will resume normal levels.

      “The drought has lasted longer than expected,” Schwartz said.

      Strategic investors for Space Systems/Loral would be welcomed as part of a partnership, joint venture or a direct sale, Schwartz said.

      “We’ve had some discussions with strategic partners who are not now in the [satellite manufacturing] business,” Schwartz said. Those prospective partners may have “a fit” with their existing manufacturing product line that involves products melded into space platforms, he explained.

      Positive developments on the horizon that could help Loral include the need for satellite operators to replace aging in-orbit spacecraft, broadband data growth, direct to home services expansion, as well as rising demand for satellite services in rural America and other regions of the world, Schwartz said.

      –Paul Dykewicz

      (Bernard Schwartz, Loral Space, 212/987-1105; Joseph Wright, PanAmSat, 203/210-8606; Steve Symonds, Symonds Associates, 203/834-2766; Roger Rusch, TelAstra, 310/373-2195; Dianne VanBeber, Intelsat, 202/944-7406)

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