[Satellite News 03-24-09] The ability to access funding for business plans has become a lot tougher than it was just 12 months ago, casting a huge shadow not just over the satellite sector but over industries around the globe. The impact already is being felt, with WorldSpace filing for bankruptcy; GTV, a satellite pay-TV operator in sub-Saharan Africa, closing; and Sirius XM Radio striking a last-minute deal to resolve its financial issues, and more casualties could before the year is out.
     Satellite News Associate Editor Mark Holmes spoke with Maury Mechanick, counsel with White & Case; Todd Mitchell, satellite equity analyst for Kaufman Brothers; and Watts Capital Partners CEO Tom Watts about the financial state of the satellite industry.

Satellite News: Is the satellite sector in good position to cope with the global recession?

Mechanick: While the satellite industry is probably in no worse shape than any other industry segment in terms of ability to cope with the overall global economic recession, that certainly does not mean that it faces smooth sailing either. The wave of significant bankruptcies is only going to get worse, as evidenced already by the telecom sector. The extent to which this will engulf the satellite industry is unclear, although indications are that WorldSpace could be the tip of the iceberg.

Mitchell: Within the U.S. consumer satellite services, the financial health of both the large DBS platforms is very good, even though Dish has had some operating setbacks recently. Both companies are generating a tremendous amount of free cash flow, and both have very strong balance sheets. On the other hand, Sirius and XM have collapsed. I think that business model has always been questionable — too high of a fixed-cost base, too high subscriber acquisition costs and too many close substitutes.

Watts: Like all other industries, the satellite industry is likely to experience increasing stress over the coming year. There has been a slowing of traffic growth in multiple sectors. Some of the earlier stage companies such as Orbcomm have seen their growth slow significantly. Companies such as Iridium and Globalstar that must raise significant amounts of capital may see their plans pushed back. Companies with high levels of leverage, such as Intelsat, may even have to look at restructuring their balance sheets.

Satellite News: How big a problem will access to funding be in 2009?

Mechanick: Those with longer term debt obligations are probably fairly secure as long as cash flows are not seriously impaired. It will be those that have shorter term debt with the need to rollover the debt in 2009 or possibly even 2010 that will face greater pressure. More generally, the smaller operators and aspiring new entrants will be hit a lot harder than the larger,
established players. Mergers or takeovers, if they occur, are more likely to be as alternatives to bankruptcy filings rather than driven by sound fundamentals.

Mitchell: Access to funding has become more difficult than any period in my professional experience. Ultimately, the credit markets will open up, but this will be a slow and uneven process. The first companies the credit markets will open up to will be ones that have strong cash flow and strong balance sheets — or the ones that need it the least. The second group of companies it will open up too will be companies that may not be the highest credit quality, but which do a lot of business with the banks. Banks will lend to them to them to protect that sources of fees. However, somebody who is looking for financing to get something off the ground could be in trouble.
Watts: No company will be immune.

Satellite News: Craig Moffett, managing director of Sanford Bernstein, said in late 2008 that, “We are heading into a nuclear winter of funding.” Do you agree with this statement?

Mechanick: If true, I think we may have already exited it, although the landscape still may not be much improved. Funding will be available for those prepared to pay the full freight, but the terms and conditions will be much more stringent than before.

Mitchell: I think it will be very, very tough to get funding for new ventures and distress properties, but at the same time, you will have companies like DirecTV and the Dish Network who will have access to credit. Access to capital really has a lot to do with the characteristics of the borrower. Funding is tight, but I think for companies with good cash flow characteristics and strong balance sheets, there will be financing out there.

Watts: I do agree with Craig. While credit markets have improved for investment grade issuers, lower quality companies will face significant challenges in finding capital.

Satellite News: Do you expect to see more satellite players enter bankruptcy?

Mitchell: Probably. The issue with satellite-based services is they have a very high fixed-cost basis, and because of that, many of these companies have very heavy debt levels, and with the credit markets virtually closed, any company that needs to refinance because of maturities is
basically out of luck. In general, any company which is not fully funded or requires large amounts of capital or which needs to ride out large losses in the beginning is at risk of not being viable in this environment.

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