Private equity firms have long been a source of funding for ambitious satellite companies. However, with testing economic times as well as new modes of financing being used, their role in the sector going forward is open to debate.
Private equity firms have a good reason to avoid competing with Export Credit Agency (ECA) loan rates in the satellite industry. Approximately one-third of all satellite-related finance deals signed in the past three years have involved ECAs. Since 2009, more than $6 billion in loans and loan guarantees were made to satellite firms at below-market rates, with better-than-market repayment terms, according to a satellite financing report issued by the Milbank, Tweed, Hadley & McCloy law firm earlier this year. Between France’s Coface, the U.S. Export-Import Bank and the Chinese government, export-credit agencies have been active in securing the domestic and international satellite and launch industries.
While private equity firms also are looking to put their investment capital to work in the face of strong headwinds for the satellite industry, uncertainties in the economic outlook could make it difficult for buyers and sellers to agree on price. While private equity firms may or may not want to shop alongside ECA rates and propel satellite deal-making, the real question for the financing market in 2012 exists for the smaller satellite companies that traditionally do not have access to significant loans. Are private equity firms willing to take on new investments? Or, can financial problems be solved more efficiently through mergers and acquisitions in a market saturated with struggling start-ups?
Hugh MacArthur, head of private equity industry consultant firm Bain and Co., sees debt-market conditions as less favorable in 2012 than in 2011. His primary concern is whether the available supply of debt will be able to keep pace with demand.
“Even if deal-making picks up, it’s likely that credit markets will remain accommodating as long as the hunt for yield in a low interest rate environment continues to attract investors,” he says. “Private equity firms will feel pressure to unload assets in 2012. They have been slow to return capital to investors since the downturn and the exit overhang has grown to nearly $2 trillion globally, due to the fact that 48 percent of the private equity sector’s total funds that have been earmarked for buyouts is being held in funds raised during 2007 and 2008.”
MacArthur warns that unless that capital is invested by the end of 2013, general partners may need to release limited partners from their commitments and forego the management fees and potential carry it could generate.
That said, one may ask — how does the state of the private equity environment affect satellite companies coping with credit constraints and market uncertainty and looking to get new satellite ventures and projects off the ground? The answer may be that despite 2012 looking like another year that will pass in an uncertain economy, demand for mobile, broadband and fixed satellite services continues to surge ahead.
Nic Volpi, principal of private equity firm Permira, however, says that the satellite sector’s health and ability to generate opportunities has attracted private equity firms like Permira to satellite investments. Volpi, who joined Permira in 2008, is a member of the firm’s financing group and has worked on numerous transactions including Aearo Technologies, Arysta LifeScience, Asia Broadcast Satellite (ABS), Freescale Semiconductor and Intelsat.
“The satellite industry has always presented Permira with good investment opportunities,” says Volpi. “This is a natural fit, due to the long-term contract structure and strong cash flow generation that are prevalent in the satellite market. These factors are clearly attractive to financial buyers. Permira, for example, has a long history in this sector and have worked to foster the investment relationship between the public equity world and the satellite industry. Our early deals with Inmarsat and Intelsat generated very strong returns for our funds investors. Our agreement to purchase ABS gave us a nearly 100 percent interest in a fast growing, Asia-Pacific operator that is developing in one of the most dynamic markets in the world. This shows that the private equity model can work.”
James Murray, a managing director at Morgan Stanley, believes that the combination of unpredictable financial conditions and the need for more space and related terrestrial infrastructure has necessitated creative and resourceful financing solutions. He says that, in the satellite sector, the prevalence of ECA support, access to a choppy high-yield marketplace, strategic partnerships and joint procurements may serve as better alternative for financing.
“Private equity finds it difficult to compete with ECA rates, which are unmatched and feature loan covenants that are flexible,” says Murray. “At this point, the question of whether ECA involvement distorts the market is almost beside the point because ECA financing is popping up everywhere. This could have a chilling effect on the equity markets’ view of startup satellite operators, and in some cases, established operators.”
Some analysts say that with so many telecommunications satellite systems in orbit receiving export-credit assistance, the likelihood of loan defaults could increase and cause a general pullback by the agencies. The track record of ECAs in the satellite sector has been solid so far and some analysts say that track record has stimulated more ECA transactions among established, profitable satellite operators.
Chris Quilty, senior vice president of financial analysis firm Raymond James, agrees with Volpi that the endurance of the satellite sector has proven its worth as a safe investment for all types of financiers. “I believe that the way the satellite industry has performed during the recession, combined with the fact that it has acquired the capital it needs to launch projects that will generate long-term growth, should make satellite attractive to the private investment world,” he says.