With Mexican satellite operator Satelites Mexicanos S.A. de C.V.‘s (Satmex) facing numerous questions about its future, a group of the company’s creditors filed an involuntary Chapter 11 petition against Satmex in the U.S. Bankruptcy Court for the Southern District of New York.
Satmex, the creditors claim, faces growing debt. In addition, the health of one of its active satellites is in question and a replacement is stuck on the ground without enough cash to finance its launch,
The bankruptcy petition, filed jointly May 25 by ad hoc committees of holders of the Senior Secured Floating Rate Notes Due 2004 and holders of the 10 1/8 percent Senior Notes Due 2004 issued by Satmex, calls for the bankruptcy court to implement a debt restructuring plan that committee members agreed upon. The plan will enable the operator to continue its business operations and get Satmex 6, which sits in storage at Arianespace‘s launch facility in French Guiana, into orbit, the creditors said.
The committees have been working for nearly two years to get Satmex to voluntarily restructure, but “their attempts were slowed due to [Satmex’s] inability or unwillingness to forge ahead,” according to the petition, “By the start of 2004,” the petition continues, “the ad hoc committees had become increasingly concerned that Satmex’s existing satellite service could not be relied upon to service Satmex’s indebtedness; the launch of Satmex 6 was imperative for the continued operation of Satmex’s business; and Satmex was unable to obtain financing for the launch of Satmex 6.”
Under the plan, the creditors, who hold $523.4 million in secured and unsecured notes, will provide Satmex with up to $55 million of new financing to pay the costs of launching Satmex 6. The reorganization plan “allows [Satmex] to meet its obligations to creditors and discharge its obligations as a regulated satellite service provider, and would have allowed existing shareholders to retain a substantial ownership interest in the restructure company,” the court filing said.
The creditors claim Satmex’s two principal commercial shareholders, Loral Space & Communications and Principia S.A. de C.V., which purchased a 75 percent equity stake in Satmex when the company was privatized, have agreed to the restructuring plan.
But the third major stakeholder, the Mexican government, has not approved the plan, because it did not address a note issued by a subsidiary of the Loral/Pricipia joint venture as part of the terms of Satmex’s privatization, even though the note is not an obligation of Satmex.
Shortly after rejecting the plan, the Mexican government appointed an observer to the Satmex board of directors and instructed the company “not to engage in any further restructuring negotiations with the ad hoc committees pending the government’s formulation of its own restructuring plan,” according to the petition, which cites a March 29 El Financiero news article. The Mexican government will not sell its equity in Satmex and will make sure that the note from the subsidiary is addressed in any restructuring plan, according to an official from the Mexican Ministry of Communications and Transportation quoted in the article.
Members of the creditors’ committees met with Mexican government officials May 17 to hear an outline of the government’s proposal and concluded that “the Mexican government will only consider restructuring alternatives that divert substantial value from the creditors of [Satmex] to a creditor of [Satmex’s] shareholder” to pay the outstanding note it holds, the petition said. “As a result of this position, there is no chance that the ad hoc committees will be able to reach an acceptable out-of-court restructuring agreement with [Satmex].”
The petition calls for the bankruptcy court to waive the waiting period for implementing the restructuring plan. Satmex did not respond to requests from Satellite News for an interview. In a May 27 press release, the company stated it “intends to maintain continuous communication with its counterparts during this process with the objective of working cooperatively toward an equitable and just solution to its financial situation.”
Members from the legal teams representing the debt holders as well as Loral also did not respond to requests for an interview, declining to comment.
Mitchell Harwood, managing director of Evercore Partners, financial advisor to some of the creditors, said in a press release the petition was filed “in order to preserve the value of [Satmex’s] assets and to provide a comprehensive and timely solution to its financial difficulties, which have been on-going prior to [Satmex’s] first major debt payment default in August 2003. The noteholders believe that the Chapter 11 restructuring will provide current and potential customers with comfort that the company’s telecommunications services will continue uninterrupted.”
Skip Victor, senior managing director of Chapin Capital Partners and financial advisor to another group of petitioning holders, said in the same release that restructuring “will provide for the critical new funding needed to launch Satmex 6 in a relatively short time frame.”
Financial Woes
Part of Satmex’s financial woes can be tied to the delayed launch of Satmex 6.
The petition notes that the satellite originally was supposed to be launched in the first quarter of 2003. To finance the launch, Satmex received approval in April 2003 from Compagnie Francaise d’Assurance pour le Commerce Exterieur (Coface) to support 85 percent of the cost of the Satmex 6 launch and approval from the United States Export- Import Bank (Ex-Im Bank) to support 85 percent of the eligible costs of Satmex 6, insurance, ground equipment and related investments. As part of the Ex-Im Bank financing requirements, Satmex had to repay, refinance or restructure its floating rate and senior notes and Servicios Corporativos Satelitales S.A. di C.V., a wholly-owned subsidiary of the joint venture formed by Loral and Principia to acquire Satmex’s capital stock, had to restructure its debt obligation to the Mexican government, which owns the remaining 25 percent of Satmex.
On March 8, 2004, the petition notes that Satmex disclosed that the Ex-Im Bank loan guarantee expired and the committees “believe that the Ex-Im Bank was no longer willing to move forward with the refinancing because of the propulsion operating system problems of Satmex 5.” Except for the financing proposals suggested by the ad hoc committees, “no alternative source of Satmex 6 launch financing has been announced by Satmex, nor has any new launch date for Satmex 6 been scheduled,” the filing said.
In addition to the defaults on its debt, Satmex also is in a position to be taken over by the Mexican government. When the Loral/Principia joint venture purchased its 75 percent of the equity in Satmex, it agreed to pay $647 million in cash and its Servicios subsidiary issued a $125.1 million note in December 1997 to the Mexican government. The pay-in-kind note accrued interest at a rate of 6.03 percent per year and matured in December. The note is secured by a pledge of Loral’s and Principia’s holdings in the joint venture. As of the filing, Servicios owes the Mexican government about $190 million on the note. But because the note is an obligation of Servicios, the creditors claim the note it is not an obligation of Satmex and insubordinate to all other obligations of Satmex, the creditors claim.
Satellite Woes
Satmex currently has two satellites in orbit, though one is out of service and operational issues plague the other.
The company lost its first satellite, Solidaridad 1 in August 2000. According to the petition, the company received an insurance payment of $235.3 million, which it applied to its debt, as well as the manufacture of Satmex 6. Solidaridad 2 remains in use.
Its other active satellite, Satmex 5, which was launched in 1998, has had problems with its Xenon-Ion Propulsion System (XIPS), leading to a decrease in its useful life. The petitioners say the satellite has about three to four years of service left.
In April 2001, Satmex 5 experienced difficulties starting the back-up propulsion system of the XIPS, which provides station-keeping capability for the satellite. Satmex was able to start the backup propulsion sub-system and service was not interrupted. However, Satmex began using the back-up XIPS system as the primary propulsion system and the primary XIPS system as the back-up, the petition said. The backup system suffered a problem Nov. 17, 2003, during standard station-keeping procedures. This was followed by a failure of the primary XIPS Dec. 1, 2003, but Satmex engineers were able to return it to service.
“The operational problems with Satmex 5 resulted in a reduction in the insurance coverage available for that satellite and further highlighted the need to launch Satmex 6 as a replacement for Satmex’s two aging in-orbit satellites,” the petition stated.
