It was not so long ago that the mobile satellite service (MSS) sector looked dead in the water. With the exception of longest-standing incumbent Inmarsat, which boasted a successful IPO on the London Stock Exchange and an investment by Harbinger Capital Partners (now to be relinquished), the players were a bedraggled-looking lot.

The three companies that had gone through bankruptcy reorganizations in the late 1990s and early 2000s — Iridium, Globalstar and ICO Global Communications — were saddled with aging constellations, no obvious way to finance their replacements and a hodgepodge of business plans for which demand had not been proven. For companies that already had exited bankruptcy, it was not a cheery story to tell investors. In satellite conferences and publications, the viability of this group and the availability of financing for all those business plans were questioned openly, the suggestion repeatedly made that sector consolidation was the best the players could hope for, and that low- and mid-Earth orbit just was not big enough for the lot.

But something happened on the way to the wrecking yard. Globalstar announced its 2009 package of $586 million in loan guarantees from Coface, the French government’s export credit agency, representing a syndicate of banks. The financing funded Globalstar’s second generation constellation of satellites that are being manufactured by Thales Alenia Space. In October, Arianespace’s Starsem affiliate launched the first six satellite of the planned 24-satellite constellation. Four years ago, right after its public offering, Globalstar announced that its first-generation constellation antenna arrays were degrading at a rate that would leave it with service gaps and outages before the second generation could come into service. Globalstar’s shares plunged and investors immediately sued the company. The financing package and satellite launch represents a major comeback.

Iridium, which had maintained a significant government and military customer base, was not to be outdone and announced in October the signing of a Coface facility of up to $1.8 billion, to be provided by a syndicate of banks, for the design and manufacture of its next-generation constellation. Earlier in the year, Iridium also named Thales Alenia Space as its new constellation’s prime contractor.

ICO, coming off the prepackaged restructuring in 2009 of its DBSD North America subsidiary, completed a smaller but significant $30 million rights offering through a shelf registration in March.

This availability of export credit financing, especially in the face of harder to obtain traditional sources of credit, is good news for the industry, but it may come with a cost.

First, Coface, in particular, and export credit agencies around the globe, in general, including the U.S. Export-Import (Ex-Im) Bank and Export Development Canada, have emerged as significant and often indispensable players in satellite finance, particularly for new and infrastructure-related service offerings. In the face of the credit crisis of 2008-2009 (which arguably is not over), export credit financings in the sector have jumped ten-fold, from $300 million to $3 billion. For 2010 to date, commitments total more than $2 billion. Without this avenue, much of this financing would not have occurred, and particularly for these resurgent MSS players, other means might not have been available in time or in the amounts to allow the operators to move forward with their next-generation systems. Now, more established players are jumping on the bandwagon. Inmarsat has announced that it will seek more than $500 million in Ex-Im financing for the purchase of satellites from Boeing Satellite Systems International.

The cost is clear. Export credit agency financing can be seen as a subsidy, particularly when made available to borrowers who would not have qualified for purely commercial credits as cheaply or at all. Export credit agencies insist that their guarantees are competitive commercially, but this is difficult to prove. Even given loan guarantees ostensibly competitive with commercial lenders, the fact remains that export agency credits can be used to boost national champions and direct business.

No one seeking export credit agency finance is going to complain. That point will be made only by players not taking that route that think their competitors are being unfairly subsidized for obvious quid pro quos. Would Coface have guaranteed a syndicate lending for a constellation to be built by Boeing? Would Ex-Im do so for satellites to be procured from Thales Alenia Space? It is a fair question.

Owen D. Kurtin is a founder and principal of private investment firm The Vinland Group LLC
and a practising attorney in New York City. He may be reached by e-mail at [email protected].