Advanced Television

Fitch: BBB for SES, B+ for Intelsat

March 14, 2022

SES has received a favourable review from Fitch Ratings for its borrowings. Fitch says that SES’s long-term debt is rated at ‘BBB’ and its subordinated borrowings are rated at ‘BB+’. Fitch highlights the options that SES will shortly have from the FCC’s next C-band incentive payments of some $3 billion.

Sandeep Jalan, CFO at SES, commented: “We are delighted to initiate a rating with Fitch, which recognises SES’s strong business profile. We are committed to maintaining a strong balance sheet while continuing to pursue our strategy to grow our footprint and leadership in the global satellite sector.”

Fitch says: “SES’s rating reflects the company’s leading position in the global satellite sector, which is supported by its prime position in the European video segment and multi-orbit, global satellite network infrastructure. SES has strong underlying free cash flow (FCF) generation that enables it to manage peaks in capex investment cycles. The easing of this investment peak in the next two to three years, combined with an inflection in the current decline of EBITDA, will build organic deleveraging capacity and financial flexibility.”

Fitch adds that proceeds from the sale of C-band spectrum in the US (about $4 billion by 2024) will give the company further, significant discretionary capacity to manage its financial profile.

“The proceeds will also provide optionality for M&A, shareholder returns and the management of medium-to-long-term operational risks relating to potential new competition from low-earth orbit (LEO) constellations and the substitutional effects from terrestrial fibre deployments. The optionality and improving financial flexibility are key drivers [for SES]. The sale of C-band spectrum in the US has delivered $1 billion of gross proceeds over 2021-2022 and should deliver a further $3 billion in [early] 2024. SES intends to use proceeds from the initial tranche to reduce debt and is retaining optionality on the use of the $3 billion. We believe retaining this optionality is important for the company’s credit profile given medium-term operating risks. Fitch’s base case assumes that the second tranche of proceeds will be used for M&A and share buybacks. This reflects a low impact from medium-term risks relating to LEO constellations and revenue degradation in the video segment,” notes the report.

Meanwhile, Intelsat, which emerged from its Chapter 11 bankruptcy on February 23rd, has received an attractive debt rating for its Intelsat Jackson sister company’s debt. Fitch, gives the company a rating of B+ for the debt and ranks it as ‘positive’.

Fitch has assigned instrument ratings based on the company’s capital structure at emergence. A ‘BB’/’RR2′ rating has been assigned to Intelsat Jackson Holdings’ $500 million senior secured super-priority revolving credit facility, and a ‘BB-‘/’RR3’ rating has been assigned to the senior secured first-lien term loan B and notes.

“The rating incorporates anticipated de-levering following the reimbursement of certain C-Band spectrum clearing expenses in 2022 and 2023, and the anticipated receipt of accelerated relocation payments to be received in early 2024 following the clearing of additional spectrum by YE 2023. Concerns include the secular pressure on legacy revenues and execution risks around further spectrum clearing and capitalising on strong tailwinds regarding inflight connectivity,” says Fitch.

In December 2020, Intelsat acquired GoGo Inc.’s commercial aviation business for $400 million in cash. “An installed base of more than 3,000 aircraft positions Intelsat’s commercial aviation business as one of the largest inflight connectivity (IFC) and wireless inflight entertainment providers. A portion of the company’s ongoing investment program in next generation software defined satellites and related ground infrastructure support the expansion of the IFC business. These services have strong tailwinds as passengers and airlines put increased emphasis on being connected inflight,” adds Fitch.

“The rating incorporates the company’s long-term leverage target of 2.5x (gross debt to EBITDA) and the potential for the company to reach its target range in 2024, when it receives up to $3.7 billion in accelerated relocation payments in early 2024 for clearing its C-Band spectrum. Fitch will assess the Positive Outlook at that time, and consider the level of debt repayment, the operating environment, and potential other uses of proceeds to strengthen its operating profile. Fitch believes provisions in the credit agreement will strike a balance between significant debt repayment requirements while maintaining a fair degree of financial flexibility,” the note adds.

Fitch believes the risk of major US wireless carriers acquiring C-Band spectrum not fulfilling their obligation to make clearing payments is very low, as they are highly incentivized to make the payments in order to begin deploying the spectrum. A two-week delay in January 2022 in deploying the spectrum and mitigation efforts over the coming months, agreed to by the carriers and the Federal Aviation Administration, are not expected to impact the timeline to receive the 2024 accelerated relocation payments.

C-band Spectrum Source of Funds: The FCC’s final order for the C-band auction provided for accelerated incentive payments to all C-band operators of up to $9.7 billion, of which Intelsat would receive $4.87 billion, in two tranches in 2022 (approximately $1.2 billion has been received) and 2024. The FCC order also provided for cost reimbursements.

In the satellite services business, as a provider of communications infrastructure, comparable businesses to Intelsat would be Eutelsat (BBB/Stable), Viasat Inc. (B+/Positive), Telesat Canada (Not Rated) and SBA Communications (NR). Eutelsat and Telesat are the most directly comparable companies, given that they, along with Intelsat, are three of the top four global fixed satellite services provider.

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