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26 Apr 1999
MOODY'S LOWERS LONG TERM DEBT RATINGS OF HUGHES ELECTONICS CORPORATION TO Baa2 AND CONFIRMS PRIME 2 SHORT TERM RATING; CONFIRMS LONG AND SHORT TERM RATINGS OF PANAMSAT CORPORATION
Moody's Investors Service downgraded the long-term rating of Hughes Electronics Corporation (Hughes) to Baa2 from Baa1 and confirmed its short-term rating at Prime-2. At the same time, Moody's confirmed the Baa2 long term and Prime-2 short-term ratings of PanAmSat Corporation, an 81% owned subsidiary of Hughes. The rating outlook for Hughes' long and short-term rating is stable and the outlook for PanAmSat's long and short-term ratings remains negative. These rating actions do not impact the debt ratings of General Motors Corporation which has a 73.5% economic interest in Hughes.
Moody's rating action on Hughes' long term debt reflects the expected increase in the company's leverage arising from an aggressive capital spending program and from the acquisitions of Primestar, Inc. (Primestar) and U.S. Satellite Broadcasting (USSB). Moody's rating action reflects the potential integration issues attendant to the acquisitions, particularly with regard to Primestar. It also recognizes the use of equity for a significant portion of the financing of the acquired companies. In addition, Moody's rating incorporates the increasing competitive challenges facing Hughes' DirecTV business, which is expected to become a more important contributor to the overall revenue of the company. The overall diversity of Hughes' business mix and its commanding market position is also an important consideration to Moody's rating.
Moody's confirmation of PanAmSat's rating reflects the underlying strength of the company's revenue stream and customer base, its leadership position in the satellite market, and the support provided by Hughes in its capital structure. The negative outlook was placed on PanAmSat's rating on September 9, 1998 in response to the above average number of technical difficulties experienced by the company in the operation and launch of its satellites. Should the occurrence of technical difficulties continue, the company may not achieve the improvement in its debt protection measurements as expected.
Ratings downgraded are as follows:
Hughes Electronics Corporation - to Baa2 from Baa1 pass-through certificates and bank loan rating.
Ratings confirmed are as follows:
Hughes Electronics Corporation - Prime-2 short term rating
PanAmSat Corporation - Baa2 senior unsecured notes and bank loan rating
PanAmSat Corporation -Prime-2 short term rating.
In December 1998, Hughes' board approved projects related to the company's expansion of its satellite service capability. This includes both the expansion of PanAmSat's satellite fleet as well as a program to develop broadband technologies, which Hughes calls Spaceway, to allow for improved point-to-point and two-way telecommunications services. The investment to achieve these objectives will result in a shift in the company's capital structure towards higher debt levels. Once completed, the projects may provide substantial returns over time; however, the upfront investments entail risks relating to technology and to the price users will be willing to pay relative to the costs of providing the service.
In January 1999, Hughes announced an agreement to buy USSB for $1.3 billion and Primestar for $1.8 billion. The consideration for these transactions will be partially from equity and partially from cash. The cash portion will contribute to increased debt levels. In addition, the integration of two sizable acquisitions pose potential integration risks to Hughes' DirecTV operations, particularly from Primestar. Moody's believes there are synergies that can be achieved from the USSB acquisition; however, in the near term, these will be largely offset by conversion costs from the Primestar acquisition.
DirecTV continues to grow its subscriber base, however, competition from other satellite providers as well as cable operators continue to challenge the company's results. Moody's believes that aggressive new marketing offerings by other satellite providers and product upgrades by cable operators will ensure a competitive environment for DirecTV for the foreseeable future. This could hinder future reductions in new-subscriber acquisition costs or possibly slow the company's currently strong subscriber growth. In addition, Moody's believes, over time, there is potential event risk should DirecTV reconsider its distribution strategy.
Hughes remains a vertically integrated satellite company with commanding market positions in both manufacturing and the operation of geostationary satellites. This provides some stability to the company's earnings. Moreover, certain of Hughes' businesses, such as PanAmSat, have substantial asset valuations which could be monetized in periods of financial stress. This provides added financial flexibility and is an important consideration in the company's rating.
PanAmSat has a low-risk business model which is based on long-term, fixed-priced contracts with major media companies. The company has a well diversified array of geostationary satellites covering most major regions of the world. The company has been actively increasing the number of transponders in orbit which is expected to substantially increase the company's third-party debt levels over the near term. Since a large portion of the satellite capacity is fully leased pre-launch, or is fully leased within a year or two after launch, Moody's expects PanAmSat's cash flow to commensurately increase. However, the company experienced a number of technical issues in 1998 that has slowed the pace of revenue growth. Over time, if the rate of such technical capacity curtailments does not abate, downward pressure on the rating could result.
Moody's believes that the supply of available satellite transponders in space will grow substantially in the near term. This could impact either the level of transponder pricing or the continued willingness of customers to commit to fixed prices over a long time period. Should this occur, the addition of new contracts could introduce greater volatility in the company's revenue base and, over time, could lead to downward pressure on the company's rating.
Hughes provides support to PanAmSat through a $1.725 billion intercompany note which is subordinated to most of PanAmSat's creditors. This note matures in June 2003 and is a significant part of PanAmSat's capital structure. An important consideration to Moody's rating of PanAmSat is Hughes' continued support of its subsidiary through this intercompany obligation.
Headquartered in El Segundo, California, Hughes Electronics Corporation is the world's largest manufacturer of geostationary satellites and a leading provider of direct-to-home and very small aperture satellite terminal (VSAT) services. PanAmSat Corporation, headquartered in Greenwich, Connecticut, is the world's largest commercial operator of geostationary satellites.
No Related Data.
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