In times of economic gloom, investment banks, export credit agencies and private equity companies look to find safe investments in companies that provide few risks. Over the past year, the satellite sector has proven itself as a representative of these solid and safe bets.
This reputation has put satellite companies, particularly those established operators with predictable cash flows going forward, in the best position to gain financing in the difficult economic climate. “I think this is one of the best capital markets period in my career to raise capital. If you were to go back and count every day since January 1990 that the high-yield index has had absolute yield levels below the current levels, you would find that only 3 percent of the days in the last 20 years had lower yields, so on an absolute yield basis, we are in the 97th percentile of history,” says Fred Turpin, managing director, JP Morgan. “Very low treasury yields are a big driver of the current market. Treasury yields are low due to the weak economy as well as government policy in the United States. If treasury yields rise in the future, then high-yield is likely to become more expensive. Right now, we are in as good of an environment as we could ever hope to be.”
James Murray, managing director, Morgan Stanley, says FSS operators have an historic opportunity to access debt capital with the most attractive absolute rates seen in a generation. “The high-yield market is actually stronger than it was in the early fall. It is hard to say how long this window will remain open, but issuers and underwriters remain optimistic, and the backlog of offerings is large. The high-yield market is robust right now for cash flow-positive operators but less so for start-ups. There are a number of smaller players who are, as a result, looking for equity capital,” he says.
Turpin highlights the performance of satellite companies throughout the last few years as an example of why they are viewed so favorably by investment banks. “If you look at the FSS sector, these companies have strong businesses, predictable revenues and visible backlog — all of which the credit markets like. They especially like predictability, because the last three years were so difficult in the market and you have had North American FSS players so highly levered at the time, investors had the opportunity to watch these assets perform financially in extremely difficult capital markets, and they performed extremely well. Even though Telesat and Intelsat were once levered at 8 times EBITDA, the businesses performed just fine with very high levels of leverage. Now that the markets are better, debt investors feel even better about these businesses,” he says.
New Projects
Philippe-Olivier Rousseau, a senior banker at BNP Paribas, is a little more circumspect when analyzing the current state of the finance markets for satellite players. “I would say that anyone looking at these markets will see these as highly profitable, but because of timing issues and because of regulatory/political issues, potential debt and equity investors will be pretty selective. I think overall, markets are rather good, but if you look at the equity or [public equity] markets, it is clearly not the same as it was in around 2005-2006, just before the crisis. Money is more scarce and more expensive. New countries/regions are very exciting, but there are high levels of risks,” he says.
While there are opportunities for large operators such as SES and Intelsat to secure financing at better rates, it becomes more complex when looking at opportunities for start-up satellite players. “For these players, gaining finance is tougher but not necessarily a lot tougher,” Rousseau says. “These are greenfield projects. Basically, for raising equity for new projects, this is not necessarily the best period. I would not say it is not doable, but once again it is on a case-by-case basis. It also depends on which subsegment of the satellite sector you would be looking at. Firstly, you can look at regional players who provide capacity for TV and satellite broadband services. I think these types of players could raise equity. Secondly, if the company is trying to raise equity in an area where the competition is already strong, it would be harder.”
Turpin agrees with Rousseau, noting that Coface and other alternative forms of financing are as available today as they have ever been. “One of the challenges with the high-yield market is that you need to be doing an approximately $200 million deal for it to be sufficiently liquid for it to be well-priced. There have been different points in time where you could do smaller deals, but the market still remembers three years ago when it was very hard to sell securities that were issued in small deals,” he says. “Generally, larger deals trade better and give the holders more options if they need to sell. If we think about the very early stage player, sometimes $200 million is more capital than they need and too long dated. If your business performs well, you are going to outgrow a small first deal relatively quickly, but high-yield debt is not always easy to quickly refinance because most of the notes are not callable for three to five years following the issue. If your credit improves and the business performs, you can raise money on better terms, but the initial terms can be expensive to take out.”
Export Credit Agency Financing
Over the last two years, Coface and the Export-Import (Exim) Bank have developed much more of a presence in the satellite sector. Coface, in particular, has been in the center of many pivotal deals over the last 12 months, such as providing financial support for GlobalStar and Iridium in their efforts to fund their next-generation satellite constellations. “Clearly, there has been a shift toward this type of financing,” Rousseau says. “It has only one explanation and that is the financial crisis. [Export credit agencies] have always been a tool to support national industries, whether in the United States, Europe or France. That is not new news, but what I would say is news is that these tools have been refocused. Secondly, the effect has been to minimize political risk, whether it was right or not. Clearly, it has been extended to some countries. There has been a cultural shift, and it is hard to say how long this will go on for. I am absolutely convinced this will not last forever. My recommendation is to try and get this while it lasts, because it might not last forever.”
Turpin, however, is not sure how much impact organizations like Coface have had on the general financing landscape. “I think there are times when that capital is available at attractive prices with sufficient flexibility. It is attractive to do. I have never really thought that this crowds out traditional capital-raising. I think they coexist relatively well.”
Murray adds, “Globalstar and Iridium have been real beneficiaries of the export financing trends, particularly in Europe. While SES and others have used export financing as a small part of their capital structures, the new [low-Earth orbit] constellations are largely being financed through these vehicles.”
Export Development Canada
Export Development Canada (EDA) is another export credit organization looking to get involved more in the satellite landscape. EDA now supports Canadian companies such as MacDonald, Dettwiler and Associates (MDA) in satellite projects around the globe. EDA also is involved in financing a new satellite system for the National Space Agency of Ukraine. “We were introduced to this transaction about 18 months ago by MDA. It was seen as a bit of a game-changing opportunity for them. We ended up providing the loan to an agency of the government of Ukraine in support of the purchase from MDA. It is also possible that there might be some small extension to that Ukraine transaction,” says Paul Day, EDC’s vice president, information and communication technologies business development group.
EDA also remains active in seeking opportunities in markets in Europe and Southeast Asia, and Day says EDA likely will complete more satellite transactions in 2011. “We are seeing a number of enquiries from Canadian companies for components or component parts for some of the satellite transactions being discussed. A lot of these relate to the payload itself and their applications, so we are involved in various levels of [transactional] development from a financing perspective in a small handful of transactions right now. Consequently, I think it is quite likely you will see us involved in satellite deals in 2011. We have some deals that we are working on, but these sometime take a long time to get all the financing and technical issues lined up. The Canadian dollar has been quite strong, and this has been quite a big factor in the transactions we are looking at.”
Day says the EDA is trying to provide complementary financing to the satellite sector and does not want to be seen as a competitor to private institutions. “Our view, as an [export credit agency], is to try and fill financial gaps. We are not knowingly trying to compete with investment banks or institutional investors or commercial banks from a pricing perspective. In the case of the Ukraine, we were the only financial institution player there. We did with that under our mandate to support export trade. In some of the transactions we have seen happen this year, it is the same situation. The financial markets are continuing to be edgy and nervous. [Export credit agencies] have different objectives in terms of supporting trade with not necessarily a singular focus on [return on investment]. We will look at the risks with a more positive trade view in addition to ensuring the loan is commercially viable. By and large, what we try and do is fill a funding gap,” he says.
Private Equity
The satellite sector still can offer rich opportunities for private equity companies willing to invest. In September, Permira invested in Asia Broadcast Satellite (ABS), which itself has been aggressively investing in its own satellite assets over the last two years. Permira has used its total committed capital of about $26 billion to establish a legacy in the satellite sector, and Richard Sanders, head of technology, media, telecommunications and partner, Permira, says the sector’s health and ability to generate opportunities has attracted the firm to satellite investments. “Over the years, the satellite sector has generated good investment opportunities for [private equity] firms like ours. Long-term contracts and relatively strong cashflow generation are clearly attractive to financial buyers,” he says. “We know this sector well, as the Permira funds have been pioneers in terms of [public equity] investment in the satellite industry. Our funds did one of the early deals with Inmarsat and also invested in Intelsat, which subsequently acquired PanAmSat. Both these investments generated very strong returns for our funds investors, 4 times and 10 times, respectively.”
Sanders says ABS’s resilient business strategy throughout the recession and its four-year growth streak focused on emerging markets made the company an attractive buy for Permira. “We were impressed by the management teams and what they have been able to achieve in a pretty short period of time. They have executed a very interesting strategy which has involved [mergers and acquisitions] on existing single assets. We think the set of assets they have assembled is a strong platform on which to build to carry out the consolidation we talked about earlier. We liked the growth trends in the markets they serve. If you think about DTH in Russia, Internet backbone connectivity in Africa and some of the U.S. government requirements in the Middle East, these are all fundamentally good growth drivers. This is in sharp contrast with some of the more mature markets for satellite. In summary, they have a good performance track record, an excellent management team and a clear strategy for future expansion in growing emerging markets.”
Sanders believes that while export credit agency financing is eye-catching, it is right only in certain circumstances. “It is just another form of financing. It is attractive in some ways, and relatively cheap, but it is not that flexible. It is suitable for specific satellite build project but not for [mergers and acquisitions] and other corporate funding,” he says.
Are Financial Markets Still Nervous?
While it appears on the surface that there has never been a better time to secure financing, there remains a degree of nervousness in the financial markets, as the world’s recovery from the recession moves at a slower-than-expected pace. “One of the issues with the high-yield market, and why I think it has been so strong recently, is that the equity markets still feel a little rocky. If you look at the U.S. equity market over the last three years, there has been half a trillion dollars in outflows,” Turpin says. “So over the last three years, $500 billion has come out of equities as opposed to going in. That is a surprising number to some people and not an inconsequential amount of money. Many investors today look at the high-yield market as the only market where they can get a 6 percent to 8 percent return, which compared to other alternatives today, is very attractive. There is not much else investors can buy that can yield a return of 7 percent, unless I am willing to buy emerging market debt, and many investors are still not comfortable with the equity market.”
Rousseau says banks, particularly European banks, remain cautious. “There is a huge question mark on whether the United States will go back into recession or whether it will have soft growth. Secondly, there are huge questions regarding Europe. In Europe, you have the risk of deflation. In the United States, there will be a push towards inflation. It could be that Europe enters into a deflation period. Then there is the rest of the world. There is growth in emerging countries, but is this growth forever? And higher growth means higher risk. Banks are also naturally cautious.”
The reality is that the satellite industry has built its own momentum during the recession and banks and private equity companies are rewarding satellite’s solid returns. However, analysts still advise satellite players to get in while they can and secure the financing they need to give their businesses every opportunity in the medium to long term, as the good times may not last forever. “Today is a great period, because [export credit agencies] such as Coface and the U.S. Exim are pretty bullish for the time being,” Rousseau says. “Whether you are an existing satellite operator wishing to develop or a new operator entering into the market, I would look to take advantage of the current policies of Exim/Coface. I think this is even truer for greenfield projects. They really need that support. For existing satellite players it is nice to have, but not a must have.”
