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Rating Action:

Moody's downgrades Inmarsat's CFR to Ba2 from Ba1; outlook stable

14 Mar 2018

London, 14 March 2018 -- Moody's Investors Service ("Moody's") has today downgraded Inmarsat plc's ("Inmarsat") Corporate Family Rating (CFR) to Ba2 from Ba1 and its Probability of Default Rating (PDR) to Ba2-PD from Ba1-PD. In addition, Moody's has downgraded to Ba3 from Ba2 the ratings on Inmarsat Finance plc's $1.0 billion Senior Unsecured Notes due 2022 and $400 million Senior Unsecured Notes due 2024 , which are unconditionally guaranteed by Inmarsat Group Limited and Inmarsat Investments Limited. The outlook on the ratings is stable.

"The downgrade of Inmarsat's ratings reflects our expectation that over 2018 and 2019, Inmarsat's leverage and free cash flow will continue to be weak vis-à-vis the thresholds for the existing Ba1 rating due to its sizeable capex program, the anticipated loss of a high-margin revenue stream from Ligado and EBITDA margin dilution in its high-growth Aviation segment. However, we view positively Inmarsat's decision to significantly reduce its dividend payout and maintain its net leverage policy," says Alejandro Núñez, a Moody's Vice President -- Senior Analyst and lead analyst for Inmarsat.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The ratings downgrade reflects: (1) the anticipated loss of a high-margin revenue stream of nearly $130 million per year from Ligado from January 2019 onward; (2) our expectations of low single-digit revenue and EBITDA growth in the company's Maritime segment combined with mid single-digit revenue and EBITDA contraction in the Government and Enterprise divisions; (3) our expectation of strong double-digit revenue growth and nominal EBITDA growth in the Aviation division, but with margin dilution over 2018-2020 due to higher costs for on-board equipment installations; (4) sustained, elevated success-based capex levels through at least 2020 to primarily support the company's transition to Fleet Xpress in Maritime and its growth objectives in the in-flight connectivity market (Aviation); and (5) increasing competition in both the Aviation and Maritime segments - including the advent of direct competition from Iridium's forthcoming Certus Broadband services - which Moody's believes will challenge Inmarsat's dominant market position in maritime connectivity services.

Upon the announcement of the company's 2017 Q4 and annual results, Moody's noted: (1) that Inmarsat maintained its guided capex range of $500 million to $600 million per year during 2018-2020 reflecting capital expenditure committed primarily for Inmarsat-6 (I-6) and GX-5 satellites that will further support the company's targeted expansion in the aviation connectivity market; (2) the company's announcement that it intends to significantly reduce its annual cash-pay dividends, by 63% to $80 million in 2018 ($91 million dividends in total, including scrip dividends) onward from $203 million of cash dividends paid in 2017 and a policy of maintaining it flat at an annual $80 million except in extraordinary circumstances, as well as the maintenance of the company's 3.5x net leverage target; (3) that the high-margin revenue stream received to-date from Ligado will be paused from January 2019 without clarity as to whether Ligado may resume payments to Inmarsat after 2019 (Moody's currently assumes no resumption of Ligado revenues post-2019); and (4) that the company is due to commercially launch in mid-2018 its European Aviation Network (EAN) to provide in-flight connectivity services using Inmarsat's integrated S-band satellite and a complementary LTE-based terrestrial network built and operated by Deutsche Telekom AG (DT, Baa1 stable).

While the company's decision to cut the dividends is credit positive, it will not be enough to fully offset the expected deterioration in credit metrics owing to the loss of revenues from Ligado. Moody's estimates that the company's adjusted debt to EBITDA will stay between 3.5x and 4.0x in 2019 and 2020, while the company's free cash flow generation will remain negative throughout this period, at a time when visibility in terms of operating performance has reduced because of overcapacity in the sector and increasing competition.

Moody's notes encroaching competition from other mobile satellite services (MSS), such as Iridium Communications Inc. (Iridium) in the maritime connectivity market, and fixed satellite services (FSS) operators (e.g., Intelsat (Luxembourg) S.A. and SES S.A.), particularly in the aviation connectivity market as they partner with established in-flight entertainment operators. By late 2018, Iridium is scheduled to launch into commercial service its L-band NEXT satellite constellation in order to offer maritime connectivity services and which is expected to offer faster broadband speeds to maritime vessels than Inmarsat.

Inmarsat has adequate near-term liquidity, supported primarily by its fully available and undrawn $500 million revolving credit facility due May 2020. In addition, as of 31 December 2017, the company had a cash balance (including short-term liquid deposits with a maturity of less than one year) of $487 million. Although the company has no debt maturities in 2018-2019, the annual amortization on its Ex-Im bank loan will rise to $122 million from $81 million per year from 2018 onward.

RATIONALE FOR STABLE OUTLOOK

The stable outlook indicates Moody's expectations that Inmarsat will manage its capital expenditure and shareholder return policies over the next three years such that its gross leverage (gross debt/EBITDA, as adjusted by Moody's) will not sustainably exceed the 4.0x leverage ceiling appropriate for the rating level. The outlook also reflects Moody's view that the company will continue to be free cash flow negative (despite the recent dividend cut) over the course of 2018 to 2020 with a higher expected free cash outflow in 2019 due principally to the loss of Ligado revenues.

WHAT COULD CHANGE THE RATING UP

Positive pressure on the rating could develop should Inmarsat's: (1) (Moody's-adjusted) gross debt/EBITDA decrease sustainably and materially below 3.5x; and (2) it reached free cash flow breakeven (post-dividends) on a normalized basis.

WHAT COULD CHANGE THE RATING DOWN

Downward rating pressure would materialize if: (1) Inmarsat's debt load increases such that its gross leverage (Moody's-adjusted gross debt/EBITDA) materially and persistently exceeds 4.0x; and/or (2) its (Moody's-adjusted) free cash flow/gross debt fails to improve toward a level of at least negative 5% over the 2018-2020 period. There would also be downward rating pressure if liquidity were to significantly deteriorate.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Inmarsat plc

....LT Corporate Family Rating, Downgraded to Ba2 from Ba1

....Probability of Default Rating, Downgraded to Ba2-PD from Ba1-PD

..Issuer: Inmarsat Finance plc

....Backed Senior Unsecured, Downgraded to Ba3 from Ba2

Outlook Actions:

..Issuer: Inmarsat plc

....Outlook, Changed to Stable from Negative

..Issuer: Inmarsat Finance plc

....Outlook, Changed to Stable from Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Communications Infrastructure Industry published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in London, U.K., Inmarsat plc (Inmarsat) is a market leader in global mobile satellite communication services ("MSS"). The company owns and operates a satellite communications network comprising a fleet of ten satellites using the L-band spectrum. Inmarsat provides a range of voice and data services to customers, including telephony, fax, video, e-mail and Internet access. Additionally, Inmarsat has completed the launch of its four Global Express (GX) Ka-band satellites (the Inmarsat-5 constellation) that provide up to 50Mbps for broadband services to customers on land, at sea and in the air. In its fiscal year ended 31 December 2017, Inmarsat plc reported revenue of $1.4 billion and EBITDA of $752 million.

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.

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.

Alejandro Nunez
Vice President - Senior Analyst
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Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
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Client Service: 44 20 7772 5454

No Related Data.
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