The launch failure of Intelsat 27 (“IS 27”) as it tries to show growth before a planned IPO was widely viewed as terrible news for Intelsat. However, it may be the opposite. Of course Intelsat will lose some expected revenue. But the launch failure also gives Intelsat insurance money that may be more valuable than the incremental revenue of an in-orbit IS 27. Like many satellite ventures, IS 27 may have seemed like a good investment when it was planned, only to look less attractive years later as service commencement approached with the company in an increasingly precarious financial situation. The insurance policy gives Intelsat a chance to unwind that investment and put it to more pressing needs.
Intelsat needed the revenue from IS 27 to enhance a growth story to support a long planned IPO. However, the reality is that Intelsat is a mature company that does not earn enough return on assets to cover even the cost of its debt. A successfully launched IS 27 may have increased growth modestly from its 51-satellite fleet. But these would likely be offset, in the near term, from declines in government revenue as the wars in Afghanistan and Iraq wind down. Additional short-term pressure comes from increased competition in Africa from both space and terrestrial players. In the longer-term, increased capacity from HTS satellites flooding the market with massive amounts of capacity would likely limit Intelsat’s growth. Given that the company currently has a debt/EBITDA ratio of 8.3x, possibly exceeding its value, it’s hard to see how there is much if, any equity, to sell in an IPO.
The Intelsat IPO story was likely based on a highly optimistic scenario. It also gives debt investors a somewhat brighter glimmer of hope for repayment of its subordinated debt outside of a restructuring. This hope may help the company, at the margin, issue debt on slightly better terms. In our view, the real focus of Intelsat management is to manage its difficult debt situation. The launch failure may have provided a bit of an opening.
Intelsat’s February 1st press release indicates IS 27 was fully insured. Various trade press publications including Space.com and NBCNews.com and pegged the insurance value at around $400 million. This seems high to us, compared to the typical $250 million cost of a standard C/Ku-band satellite and an estimated additional $50 million for the UHF load. Perhaps there are other factors we don’t know that added another $100 million. And the full insurance amount might not be available to the company. Intelsat has acknowledged taking customer prepayments and may owe certain customers a fraction of the insurance to refund pre-paid capacity on IS 27. The company also has a number of partially damaged satellites that it can use to accommodate some customers. However, the extent of this capacity is, admittedly not clear to us from outside the company.
Intelsat itself is likely worth approximately 7x-9x EBITDA. So unless Intelsat will lose more than about $35 to $45 million in EBITDA annually (after juggling some customers to other satellites and losing others it cannot) from not having IS 27, it is probably better off pocketing the ~400m insurance money and using it to pay down debt. That would be more valuable than having a functional IS 27 in orbit. Based on the increased competition in Latin America and the dismal outlook IS 27’s UHF payload, this might very well be the case.
One downside from not replacing IS 27 is that Intelsat’s auditors might require them to write down the value of the 55.5 deg west orbital slot. Currently, Intelsat lists $2.388 billion in orbital slots on its balance sheet (perhaps a topic for a future post). While writing down the value of one or more orbital slots would have no direct financial impact, it would put yet another, dent in the company’s IPO story. Even if replacing the satellite is a close call, the chance to pay down debt and reduce the company’s risk is likely compelling. Don’t hold your breath waiting for an IS 27R announcement. Even if there is one in name, it probably won’t look much like the original.