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Moody’s down rates some SES debt

March 7, 2022

By Chris Forrester

Moody’s Investors Service credit ratings agency has given a “negative outlook” to certain debt owed by satellite operator SES.

Moody’s overall rating is their Baa2 rating on SES SA and SES Global Americas Holdings GP. Moody’s says the outlook for both entities remains negative. “The ratings affirmation reflects the slower reduction in the company’s revenues, our expectation that the company will return to positive growth from 2023, as well as the potential for leverage reduction once the company receives the C-band proceeds in 2024,” says Ernesto Bisagno, a Moody’s Senior Credit Officer and lead analyst for SES.

“However, the negative outlook reflects the difficult market conditions which continue to exert pressure on the video segment, and the company’s weak credit metrics for the rating,” added Bisagno.

However, it isn’t all bad news. Moody’s adds as its rationale that:

(1) the expected improvement in the company’s operating performance over 2022-23;
(2) its strong position as a global market leader in satellite-based communications services;
(3) the strategic fit and revenue contribution from O3b’s satellite constellation (medium earth orbit [MEO]) to SES’ geosynchronous (GEO) satellite fleet;
(4) its strong profitability;
(5) its balanced financial policy, with a commitment to maintain its reported net debt/EBITDA below 3.3x;
(6) the expectation that SES will be able to monetize its C-band spectrum by 2024; and (7) the moderate level of support to SES from the Government of Luxembourg.

The downside of the Moody’s report lists the challenges for SES, saying:

(1) the difficult market conditions for EMEA satellite operators as a result of which, the company’s revenues and EBITDA have sustainably dropped since 2015;
(2) the company’s strained credit metrics for its rating category because of its relatively high gross leverage;
(3) the ongoing revenue contraction in its video segment; and
(4) its negative free cash flow (FCF) in 2022 because of its investments in the new O3b mPOWER fleet. The Government of Luxembourg, directly and indirectly through its wholly owned state banks, Banque et Caisse d’Epargne de l’Etat and Société Nationale de Crédit et d’Investissement, holds an aggregate stake in SES of around 20 per cent (including collective stakes in Fiduciary Deposit Receipts).

Moody’s says it expects SES’ revenue to be broadly flat in 2022 in line with the midpoint of the company’s guidance. The rating agency anticipates SES will generate lower revenue from its video business, offset by an increase in the network and Government businesses, as the latter might see revenue growth from the current geopolitical uncertainties. Despite stable revenue, Moody’s expects EBITDA to decline in the low single digit range, due to increased operating costs, mostly related to the new satellite launches. From 2023, there is potential for a return to organic growth, driven by the contribution of the eleven O3b mPOWER satellites (nine to be launched in 2022).

“Because of high capital spending of E950 million, and to a lower extent, increased dividends (+20 per cent in 2022), SES’ Moody’s-adjusted FCF will turn negative in 2022 and is expected to strengthen significantly in 2023, driven by reduced capital spending and stronger earnings. SES’ gross debt will remain flat in 2022 because the company has sufficient liquidity to cover its funding needs, and it will marginally decline in 2023 as the company would have sufficient flexibility to repay partially the $750 million due in May 2023. As a result, SES’ Moody’s-adjusted debt/EBITDA would remain at around 4x in 2022, and should decline toward 3.5x in 2023,” says Moody’s.

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