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Rating Action:

MOODY'S DOWNGRADES RATINGS FOR HUGHES ELECTRONICS (SR UNSEC TO Ba1 FROM Baa2) AND PANAMSAT (SR UNSEC TO Baa3 FROM Baa2) AND INITIATES REVIEW FOR FURTHER DOWNGRADE; ECHOSTAR DEVELOPING OUTLOOK AFFIRMED

30 Oct 2001
MOODY'S DOWNGRADES RATINGS FOR HUGHES ELECTRONICS (SR UNSEC TO Ba1 FROM Baa2) AND PANAMSAT (SR UNSEC TO Baa3 FROM Baa2) AND INITIATES REVIEW FOR FURTHER DOWNGRADE; ECHOSTAR DEVELOPING OUTLOOK AFFIRMED

Approximately $8 Billion of Debt Securities Affected

New York, October 30, 2001 -- Moody's Investors Service has downgraded Hughes Electronics Corporation's senior unsecured long-term debt ratings to Ba1 from Baa2, and PanAmSat Corporation's senior unsecured long-term debt rating to Baa3 from Baa2 and its short-term rating to Prime-3 from Prime-2. The ratings all remain on review for a potential further downgrade. Moody's also affirmed its developing outlook for the existing debt ratings of EchoStar Communications Corporation (B1 senior implied rating; B3 senior unsecured issuer rating; Caa1 subordinated debt rating) and its subsidiaries (EchoStar Broadband Corporation and EchoStar DBS Corporation - B1 senior unsecured debt ratings for both). The rating downgrades, reviews for possible further downgrade, and developing outlook affirmation follow the announced definitive agreements that provide for the spin-off of Hughes from General Motors Corporation and the merger of Hughes with EchoStar. The PanAmSat rating actions also result from its recent announcement that it will raise approximately $1.8 billion in bank debt and long-term notes to repay a $1.725 billion subordinated term loan due to its parent company, Hughes Electronics Corporation, and provide liquidity for growth.

The downgrade of the Hughes debt ratings reflects the rising debt leverage of the enterprise, its weak operating performance, and the extreme unlikelihood under any scenario that it can maintain an investment grade rating over the intermediate-term. The review for further downgrade will focus on the legal and capital structure and long-term business plan objectives following its combination with EchoStar. It will also consider the longer-term opportunities for operating performance improvement coming from cost reduction synergies between the two platforms, as well as improving DirecTV operating profit margins closer to EchoStar's Dish Network experiences.

The downgrade of the PanAmSat debt ratings reflects its intention to refinance the intercompany Hughes Electronics Corporation's $1.725 billion subordinated term loan with a combination of bank debt and long-term notes that will effectively reposition some or all of that debt from junior capital to a level pari passu with the company's $750 million in senior unsecured notes currently outstanding. Previously, Hughes had agreed to subordinate its right of payment to the third party senior unsecured debt holders and Moody's expected that the company would gradually repay that debt with growing free cash flow and potentially new replacement junior debt. With the $1.8 billion in refinancing, including approximately $250 million in debt for liquidity, Moody's expects the company's total senior debt will increase from $750 million to at least $2.25 billion. While overall leverage for the company will be relatively unchanged, senior debt leverage will change from just over 1.0 times debt-to-EBITDA to nearly 4.0 times. Moody's also believes satellite launch delays and considerable capital investment focused on increasing revenues have decreased EBITDA and free cash flow by more than 20% over the last year. The resulting higher leverage ratios have limited the company's financial flexibility and increased operating pressures. Moody's anticipates that the new bank debt and long-term notes will be on less favorable terms than the current Hughes term loan provided, placing additional financial pressure on the company. The review for a potential further downgrade will focus on the final capital structure that will result from the planned refinancing of the Hughes intercompany junior capital loan and any additional new borrowing, and the impact if any from the merger of its parent company Hughes (81% owner) with EchoStar. Moody's also expects to evaluate the company's new business plans including the company's intention to improve margins and cashflows following a few years of disappointing operating results.

The affirmation of the developing outlook for the debt ratings of EchoStar Communications and its subsidiaries, EchoStar Broadband and EchoStar DBS, continues to incorporate several lingering uncertainties with respect to the company's business over the ensuing 12-to-18 month rating horizon. First and foremost, the announced transaction itself carries considerable uncertainty over the receipt of the requisite FTC and FCC regulatory approvals that will be necessary to successfully complete the same, notwithstanding Moody's belief that the combined company would almost certainly constitute a more formidable competitor to the incumbent domestic cable television industry than either entity would on its own, particularly over the medium-to-longer term. Additionally, a fair amount of risk and uncertainty exists with respect to the ultimate financing and organizational structure of the combined entity on a proforma basis, as well as the ability of management to successfully integrate the two distinct platforms, the realization and magnitude of expected operating synergies and reduction of inevitably duplicative overhead costs, and the broader implications of combining the Hughes assets with those of EchoStar from an EchoStar bondholder's perspective. These concerns are now additive to those previously held about the adequacy of the company's "self-insurance" practice, its ability to comply with imminently operative and applicable local signal must-carry requirements, rising churn rates as product maturation and industry peak penetration levels are approached, and general operational aggressiveness, all of which have served to temper the positive operating progress and strong liquidity position of the company up to and including the present time, but which may also change and the direction of which is therefore also uncertain over the forward period.

Hughes Electronics Corporation, with its headquarters in El Segundo, California, is a leading provider of direct-to-home digital television entertainment, broadband services, satellite-based private business networks and global video and data broadcasting.

PanAmSat Corporation is a provider of global video and data broadcasting services via satellite. Operating a global network of 21 in-orbit spacecraft and seven technical facilities, the company delivers entertainment and information to cable television systems, TV broadcast affiliates, direct-to-home TV operators, Internet service providers, telecommunications companies and corporations worldwide. PanAmSat is 81 percent owned by Hughes Electronics Corporation.

EchoStar Communications Corporation is a leading provider of direct broadcast satellite pay television services to approximately 6.4 million subscribers. The company maintains its headquarters in Littleton, Colorado.

New York
Neil P. Begley
VP - Senior Credit Officer
Media, Telecom & Technology Grp.
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

New York
Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

No Related Data.
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