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Rating Action:

Moody's confirms Telesat's B1 CFR; new credit facilities rated Ba3, notes B3, outlook stable

03 Nov 2016

US$3.1 billion of new debt and credit commitments rated

Toronto, November 03, 2016 -- Moody's Investors Service, (Moody's) confirmed Telesat Canada's (Telesat's) B1 corporate family rating (CFR), rated the company's new senior secured bank credit facilities Ba3 and new senior unsecured notes issue B3. As part of the same rating action, Moody's also confirmed the company's probability of default rating (PDR) at B1-PD, and confirmed ratings for existing debt instruments (see ratings listing, below). Telesat's speculative grade liquidity rating was upgraded to SGL-2 ( good) from SGL-4 (weak) and the ratings outlook was changed to stable from under review direction uncertain. The action concludes a ratings review initiated on 25 August 2016.

Moody's confirmed the company's ratings because "Telesat will very shortly complete a comprehensive refinance of its debts which will fully address near term debt maturities, and because Moody's adjusted leverage of debt/EBITDA is expected to be in the 5.0x-to-5.5x range during the next two years", said Bill Wolfe, a Moody's senior vice president.

In connection with launching refinance activities, Telesat issued preliminary Q3-2016 financial results on 27 October 2016 and, as part of its disclosure, announced plans to pay a US$400 million special dividend early in 2017. This amounts to about 0.7x the company's annual EBITDA and more than double its annual free cash flow. While the refinance is credit positive given that the company's debts otherwise come due February 2017, the special dividend, its second material return of cash to shareholders over the past four years, is credit negative given its leverage affect and financial policy implications.

Ratings for instruments that will be refinanced will be withdrawn in due course (refer to Moody's policies relating to ratings withdrawals). The following summarizes Moody's ratings and today's rating actions for Telesat, all of which are contingent upon Moody's review of final documentation and no material change in previously advised terms and conditions.

..Issuer: Telesat Canada

Assignments:

....Senior Secured Credit Facility: Assigned Ba3 (LGD3)

....Senior Unsecured Regular Bond/Debenture: Assigned B3 (LGD5)

Confirmations and other actions:

....Corporate Family Rating: Confirmed at B1

....Probability of Default Rating: Confirmed at B1-PD

....Outlook: Changed to Stable

....Speculative Grade Liquidity Rating: Upgraded to SGL-2 from SGL-4

....Senior Secured Credit Facility: Confirmed at Ba3 (LGD3)

....Senior Unsecured Regular Bond/Debenture: Confirmed at B3 (LGD5)

RATINGS RATIONALE

Telesat's B1 corporate family rating is driven by the company's solid business model, stable and predictable revenue and margins, and by expectations of 5.5x-to-5.0x leverage of debt/EBITDA through mid-2018. The rating is constrained by fixed satellite services industry uncertainties related to ongoing capacity additions that are likely to suppress margins for perhaps four years as excess supply is absorbed. Governance and financial policy matters related to the company's financial owners also continue to constrain the rating.

Telesat's liquidity is good (SGL-2) based on a pro forma cash balance of about CAD790 million, free cash flow of CAD125 million to CAD150 million over the next year, and a new unused US$200 million revolving credit facility. Moody's also expects that Telesat's the new bank credit facility will provide ample financial covenant compliance cushions.

Rating Outlook

The outlook is stable based on Moody's expectation of 5.0x-to-5.5x leverage of debt/EBITDA through mid-2018.

What Could Change the Rating - Up

• Debt/EBITDA expected to be sustained between ~3.5x-~4.5x (estimated at 5.3x, pro forma for special dividend)

• Free Cash Flow to Debt sustained towards ~5% (7.1% at 30 June 2016, pro forma)

• Along with: solid industry fundamentals, good execution, and clarity on ownership strategy and capital allocation plans

What Could Change the Rating - Down

• Debt/EBITDA sustained above ~6 (estimated at 5.3x, pro forma for special dividend)

• Free Cash Flow to Debt sustained below ~2.5% (7.1% at 30 June 2016, pro forma)

• Weaker industry fundamentals, execution or adverse ownership/strategy developments

Corporate Profile

Headquartered in Ottawa, Ontario, Canada, Telesat Canada (Telesat) is the world's fourth largest provider of fixed satellite services. The company's fleet consists of 15 satellites plus the Canadian payload on ViaSat-1 with two new satellites under construction. An additional two prototype satellites are under construction and will be deployed in low earth orbit. Telesat also manages the operations of additional satellites for third parties. Privately held, Telesat's principal shareholders are Canada's Public Sector Pension Investment Board and Loral Space & Communications Inc. (NASDAQ: LORL).

The principal methodology used in these ratings was Global Communications Infrastructure Rating Methodology published in June 2011. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Moody's has not provided advisory services but may have provided Ancillary or Other Permissible Service(s) to the rated entity, its related third parties and/or the party that requested the rating within the past two years (including during the most recently ended fiscal year). Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's credit rating agency in Canada" on the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bill Wolfe
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

No Related Data.
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