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Global Credit Research - 18 Apr 2011
Mexico, April 18, 2011 -- Today Moody's assigned a (P) B3 foreign currency corporate family
rating to Satelites Mexicanos, S.A. de C.V.
("Satmex"). At the same time, Moody's assigned
a (P) B3 foreign currency senior secured rating to Satmex's proposed
offering of USD325 million in new notes due 2017. Most of the proceeds
from the new notes will be used to repay USD238 million in outstanding
first priority senior secured debt and, along with cash on hand
and cash flow from operations, fund the final construction and launching
of Satmex 8 (USD186 million). The ratings were assigned on a provisional
basis pending the successful issuance of the proposed notes and final
documentation. The ratings outlook is stable.
- Sr. Secured USD325 million global bonds due in 2017,
Assigned (P) B3
"The (P) B3 rating on Satmex and its global notes reflects the company's
small annual revenue size of USD129 million and high operating risk arising
from the construction and launching of a new satellite to replace the
expiring Satmex 5, which was responsible for 39% of revenues
in 2010", said Nymia Almeida, Vice President and senior
analyst at Moody's. Insurance related to the new replacement
satellite ("Satmex 8") will be purchased, as per industry
practices, prior to 6 months from launching. Mitigating this
execution risk is the fact that 1) the satellite construction company,
Loral, will be responsible for the delivery of the satellite on
time; 2) so far, Satmex 8's construction process has
evolved with no delays, in part because of the low level of complexity
of this type of satellite; and 3) if Satmex 8 is delayed, Satmex
5 could be placed into inclined orbit to extend its useful life and continue
to generate between 70% and 80% of current revenues.
If Satmex 8 fails upon launch, bondholders will be repaid from insurance
The ratings also reflect a high customer concentration risk since,
in 2010, Satmex generated 17% of its revenues from Hughes,
which has been increasing its own transponders capacity and may gradually
need less services from Satmex. In addition, there are competitive
pressures from stronger satellite service providers as well as from telecom
operators. Mitigating these credit negatives is high customer switching
costs and growing demand for communications transmission services in Satmex's
footprint. In addition, the company's strong EBITDA
margins at around 70% and adequate capital structure, with
adjusted leverage ratio estimated to reach 3.7 times in late 2011,
pro-forma for the new notes and financial restructuring,
also mitigate high customer concentration and competitive pressures.
The new notes will be senior secured and the sole debt of the company.
The security package consists of substantially all assets of Satmex.
The new offering is part of a financial restructuring and will allow Satmex
to repay outstanding debt (USD238 million) and, along with cash
on hand and cashflow from operations, fund the remaining construction
and launching of Satmex 8 (USD186 million). The restructuring consists
also of retiring USD197.9 million in second priority senior secured
notes by converting such notes to equity in a reorganized Satmex,
plus allowing such holder to participate in an equity rights offering
for up to USD96 million. Pro forma for the new notes, Satmex's
capital structure will be composed of USD316 million in shareholders'
equity and USD325 million in debt (the proposed notes) due in 2017.
This new funding structure provides for a comfortable debt maturity profile
as well as partially funding the final construction and launching of Satmex
Satmex's USD129 million in revenues is small compared to its peers.
Because Satmex operates only 3 satellites, its revenues are concentrated
in a few sources and is exposed to potential satellite malfunctions.
This risk is partially mitigated by insurances that cover partial or total
damages to two satellites.
The company's operating risk is high. Satmex has 3 satellites
(Solidaridad 2, Satmex 5 and Satmex 6) and Satmex 5's useful
life expires in late 2012. Its replacement, Satmex 8,
has been under construction since mid 2010 and is scheduled to be launched
in August 2012. While it is certain that Satmex 8's capacity
will be 45% higher than that of Satmex 5, from now to the
end of 2012 bondholders will run the risk of failure at Satmex 5.
Satmex 5 is currently insured for only USD90 million, providing
for limited resources to bondholders in case of total damage. In
addition, bondholders will take the risk that Satmex 8 is appropriately
put into orbit and start delivering revenues upon schedule. It
should be noted that most existing Satmex 5 customers will by contract
roll over to Satmex 8 assuming a timely launch.
Long term growth prospects for the satellite industry are favorable as
broadband access needs continue to grow, which will demand increasing
transmission capacity for both broadcast and telecommunications customers.
Particularly regarding broadband access, governments in the region
are generally committed to providing "broadband access to all"
by 2015, as per agreement with ITU, the United Nation's
agency for information and communication technology issues (current average
broadband access in Latin America is at about 25%). Satmex's
operating footprint is also a plus since Latin America is, and should
continue to be, for the foreseeable future, in an economic
However, competition from larger and sometimes better capitalized
satellite service providers may suppress Satmex pricing power and limit
its cash flow generation. For instance, Intelsat Corporation
has more than 50 satellites, of which more than 30 serve the Americas
market. SES has a fleet of 40 satellites, of which more than
20 totally or partially serve the Americas. Other competitors include
Telesat Canada, Grupo Hispasat, Hispamar, and Star One,
owned by Embratel. Satmex also faces competition from land-based
telecommunications service providers such as telecom operators:
fiber optic service providers can generally offer services at a lower
cost than satellite companies for point-to-point applications.
But, because demand for data and video broadcasting is expected
to grow steadily, Satmex's main risk is that a satellite suffers
permanent damage, for which the company contracts insurances.
It is favorable to the company that customer switching costs are high
since key clients have tens of thousands of satellite dishes pointed at
Satmex's satellites and repositioning of each dish would result
in significant costs and possible disruption of customers' business-critical
functions. The company also has limited geographic concentration
of revenues: in 2010, revenues were broken down by 37%
from the U.S., 31% from Mexico, 25%
from South America and 7% from Central America and the Caribbean.
Pro forma for the new notes, Satmex has an adequate liquidity profile.
When the debt and equity restructuring is completed, which is expected
to take place in May 2011, Satmex's liquidity will be adequate
with all of its debt due in the long term. Capital expenditures
required to finish the construction and launch Satmex 8, in the
amount of USD186 million across 2011 and 2012, will be funded with
proceeds from the proposed notes and Satmex cash flows. If all
goes well with the launching of Satmex 8, as expected, Satmex
should be able to provide significant EBITDA contribution in excess of
current Satmex 5 EBITDA contribution due to the incremental transponder
capacity; if delays occur, Satmex 5 could be placed in inclined
orbit to significantly extend its useful life and, together with
the cash flow generated by Satmex, provide for enough cash to pay
intereston the new Notes.
Going forward, we believe that the company will choose to accumulate
cash for the construction and launching of Satmex 7, which will
replace Solidaridad 2, most probably starting in 2017. New
satellites generally cost approximately USD350 million in design,
construction, launching and insurance costs.
The stable ratings outlook is based on Moody's belief that i) Satmex
will be able to sustain current operating margins and ii) the launching
of Satmex 8 will be successful and the transfer of customers from satellite
Satmex 5 to Satmex 8 will occur within 3 months from launching and without
major service or commercial disruptions.
A ratings upgrade is expected if Satmex maintains current strong operating
performance and Satmex 8 not only operates as expected but provides for
meaningful additional revenues and EBITDA. For an upgrade to occur
the company should be able to sustain its competitiveness and EBITDA margins
at least at current levels.
Satmex' ratings could be downgraded if any of the construction,
launching or operation of Satmex 8 fails, and the extension of Satmex
5's useful life is not a viable alternative to sustain the company's
revenues close to current levels.
Satmex is a privately-owned Mexican satellite operator providing
fixed satellite services (standard c- and Ku-band services)
to local and international broadcasting and telecom firms as well as to
government-related entities. Satmex operates three satellites
in geo-synchronous orbital slots allocated to Mexico, covering
90% of the Americas population. In 2010, the company's
revenues amounted to about USD129 million, of which fixed satellite
services represented 82%. Moody's adjusted EBITDA
reached USD93 million, with a 72% adjusted EBITDA margin.
The company has already commenced its prepackaged chapter 11 bankruptcy
case and expects that the proposed notes, together with the balance
sheet restructuring recapitalization plan will be approved by the court
in the following weeks. The restructuring plan has already been
accepted by the classes of creditors representing Satmex's first
priority and second priority senior secured notes.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Nymia C. Almeida
Vice President - Senior Analyst
Corporate Finance Group
Moody's de Mexico S.A. de C.V
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's de Mexico S.A. de C.V
Moody's rates Satmex and its proposed notes (P) B3 stable
Ave. Paseo de las Palmas
No. 405 - 502
Col. Lomas de Chapultepec
Mexico, DF 11000
No Related Data.
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