By Theresa Foley

The satellite business had a less than stellar year in 1999 raising money in the financial markets. It failed to break new records, as some experts had expected before problems with hardware failures and the meltdown of the mobile satellite services sector slowed down financing even further starting in the spring.

Total satellite-related financings in the public markets were $7 billion by mid-December 1999, according to Donaldson, Lufkin and Jenrette. Another tally from Lehman Brothers showed the sum to be just over $5 billion, compared to $4.7 billion in 1998 and $6.2 billion in 1997. Banks involved in the financings often come up with different bottom line figures when deals are totaled, depending on what is included, and the statistics sometimes exclude non-U.S. financings. The resales of stock and loan financings, for example, also are not always included.

“Things were tough through mid-year,” says John Bensche, senior vice president and satellite services analyst at Lehman. “But sentiment is swinging back to the positive side and more companies are now able to access the markets.”

Satellite bonds overall produced dismal returns for their holders, new issues were scarcer than in previous years and loans took longer than anticipated to arrange. Despite two satellite company bankruptcies mid-year, the investment community demonstrated willingness to finance more proven satellite projects. Nearly $4 billion was raised for Echostar, including new money raised and existing stock that was sold by MCI Worldcom and News Corp.

Start-up companies had a hard time getting their deals closed even with good sponsorship and a fair amount of partner equity. Eurasiasat, for example, with heavy backing from Alcatel and Turk Telekom; ASC Enterprises, with support from Indian magnate Subhash Chandra and Lockheed Martin; and Europestar, backed by Alcatel and Loral, were close at year end to completing bank financings that had dragged on, at times for months, but remained incomplete at the end of 1999. By comparison, SES Astra and BskyB had no problem accessing the euromarket.

“Experience in recent years has shown that bank deals are highly structured, complicated and take longer than one would anticipate to put together,” says Peter Nesgos, an attorney specializing in satellite finance at New York law firm Milbank, Tweed, Hadley and McCloy.

“This year, bond and bank volume is way off compared to the prior two years,” says one New York banker who works on satellite deals. “If you take Echostar out of the bond side, you have almost no bond market for satellites….Equity was stronger in 1999, but it was mostly secondary stock and private placement.”

Vijay Jayant, an analyst at Bear Stearns and Co., says, “The bond market was not available. The deals were in the convertible market or pure equity, not high yield.” But the market for convertibles, a form of security that can be exchanged at a later date for stock, was “on fire” at year-end, Jayant notes. Echostar came in to complete a $400 million deal and then raised the amount to $1 billion when it became apparent that market conditions to raise more money were favorable.

Stocks And Bonds Paint Different Pictures

Several analysts note that the bond and stock markets are at odds in their perspectives of the satellite business. “There is a divergence between how high yield investors and equity investors are viewing satellites. Equity investors are clearly more bullish,” Bensche says. “The extreme example would be Globalstar. Its bonds are yielding around 20 percent, which is ugly. They are trading at a big discount to par, as they were sold at 12 to 13 percent. On the other hand, there is a $6-7 billion equity value in Globalstar in the market. There is an inconsistency with respect to the trading level of bonds, at 23 percent yield to maturity. That implies a company in distress.”

Easing the pain a bit was an infusion of private equity from “visionary” companies that want a piece of satellite’s future: Liberty Media, with its $425 million investment in Lockheed Martin’s Astrolink broadband satellite venture, and AOL, with a $1.5 billion investment that helps to advance Hughes’ Spaceway system. Other private deals saw Ford investing up to $120 million in Sirius, and a group of investors that included GM with $50 million and Clear Channel Communications with $75 million investing in XM Radio. Arianespace took an equity stake of an undisclosed amount in Ellipso. Teledesic also brought in more private money from Middle East investors, raising its equity commitments to $1.5 billion, according to Teledesic.

Intel and Microsoft also are quietly funding satellite ventures on a smaller scale. “It’s quiet and out of public view,” one banker comments.

Big Deals In 1999

Donaldson, Lufkin and Jenrette (DLJ), Merrill Lynch and Bear Stearns were among the investment banks raising the most money for satellite projects last year. DLJ led five deals valued at $4.2 billion in 1999, followed by Merrill Lynch with eight deals totaling $1.7 billion and Bear Stearns with four deals valued at $685 million.

Echostar clearly held the top position in 1999 among satellite companies raising money in the markets. The company started the year with a $2 billion deal to refinance all its existing high yield debt in a two-tranche (two-step) issue of bonds to replace existing ones that carried a higher interest rate. The first issue was over $1.6 billion in bonds with a ten-year term and 9 3/8 percent interest rate, and the second was for $375 million in seven-year notes with 9 percent interest. “It was reflective of the enhanced credit- worthiness of Echostar after the late November (1998) sale of satellite assets by, and an equity investment from News Corp. The refinancing provided more attractive interest rates, looser covenants and better repayment terms,” Nesgos says.

In December, Echostar went back to the market intending to raise another $400 million by selling convertible subordinated notes. The market was so receptive that the offering was increased to $1 billion. The money will be used to fund subscriber additions and a spotbeam satellite. In the same week, Echostar shareholders News Corp. and MCI Worldcom sold off part of their holdings of Class A common stock. The two, which had acquired the stock by transferring satellite assets to Echostar, sold 12 million shares of the 30 million they had received in the deal. Their remaining stock is worth another $1.5 billion.

Echostar’s January deal involved more than a half dozen banks, with DLJ leading, and co-managers including Bear Stearns, Lehman Brothers, Nations Banc Montgomery and CIBC Oppenheimer. Why are so many banks needed? “A transaction of that prominence attracts a lot of lead banks who want to be part of it. It’s indicative of the attractiveness of the issuer and the offer,” says Nesgos.

Loral and Globalstar also tapped the banks several times in 1999. Loral and Globalstar both completed public financings in January, with Loral selling $350 million in senior notes and Globalstar raising $350 million with the sale of convertible preferred stock. A loan to Globalstar for $500 million that closed in August was unusual in that Loral had two FSS satellites, Telstar 6 and 7, up as collateral. If the loan isn’t repaid, the banks have recourse to those pledged satellites. Globalstar returned in December to sell $150 million in convertible preferred stock.

And in a huge private deal in December, billionaires Craig McCaw and Subhash Chandra decided to jointly invest $1.2 billion to bail ICO out of bankruptcy. This deal had little direct involvement of the banks, although they are likely to be brought in this year to raise the money to implement the bailout. McCaw gained management control of the company with an expected 46 percent equity stake by supplying 62 percent of the new investment; and Chandra will get 28 percent of the new ICO with his 38 percent contribution of the $1.2 billion.

The Impact Of Iridium

Whether Iridium’s bankruptcy in August will continue to discourage satellite investment this year is yet to be seen. Motorola made good on the $800 million bank loan it had guaranteed on behalf of Iridium after negotiating several delays in making the payments on that loan. But bondholders fared far worse than the banks in the Iridium failure. Iridium bonds were practically worthless in summer 1999, dropping to a value of about 10 cents on the dollar. By December, with speculation that McCaw would step in and resurrect Iridium in some fashion, those bonds were trading more in the range of 30 cents on the dollar.

ICO bonds had a similar track record as the company slipped and then appeared to be resurrected.

One banker says that due diligence practices are not about to change in the wake of the Iridium fiasco. “When a company certifies and warrants something, it’s very delicate how much you can push back. You can get into legal liabilities. Bank practices have been developed over many years, and there are certain types of risks you will never totally mitigate,” he says. If the bankers trust the company’s management, things like subscriber projections will be accepted as being credible, he says.

Theresa Foley is Via Satellite’s Senior Contributing Editor.