The ability to access funding for business plans has become a lot tougher than it was just 12 months ago, casting a huge shadow not just over the satellite sector but over industries around the globe. The impact already is being felt, with WorldSpace filing for bankruptcy; GTV, a satellite pay-TV operator in sub-Saharan Africa, closing; and Sirius XM Radio striking a last-minute deal to resolve its financial issues, and more casualties could before the year is out.
The Satellite 2009 Show Daily spoke with Maury Mechanick, counsel with White & Case; Todd Mitchell, satellite equity analyst for Kaufman Brothers; and Watts Capital Partners CEO Tom Watts about the financial state of the satellite industry.

SHOW DAILY: Is the satellite sector in good position to cope with the global recession?

Mechanick: While the satellite industry is probably in no worse shape than any other industry segment in terms of ability to cope with the overall global economic recession, that certainly does not mean that it faces smooth sailing either. The wave of significant bankruptcies is only going to get worse, as evidenced already by the telecom sector. The extent to which this will engulf the satellite industry is unclear, although indications are that WorldSpace could be the tip of the iceberg.

Mitchell: Within the U.S. consumer satellite services, the financial health of both the large DBS platforms is very good, even though Dish has had some operating setbacks recently. Both companies are generating a tremendous amount of free cash flow, and both have very strong balance sheets. On the other hand, Sirius and XM have collapsed. I think that business model has always been questionable — too high of a fixed-cost base, too high subscriber acquisition costs and too many close substitutes.

Watts: Like all other industries, the satellite industry is likely to experience increasing stress over the coming year. There has been a slowing of traffic growth in multiple sectors. Some of the earlier stage companies such as Orbcomm have seen their growth slow significantly. Companies such as Iridium and Globalstar that must raise significant amounts of capital may see their plans pushed back. Companies with high levels of leverage, such as Intelsat, may even have to look at restructuring their balance sheets.

SHOW DAILY: How big a problem will access to funding be in 2009?

Mechanick: Those with longer term debt obligations are probably fairly secure as long as cash flows are not seriously impaired. It will be those that have shorter term debt with the need to rollover the debt in 2009 or possibly even 2010 that will face greater pressure. More generally, the smaller operators and aspiring new entrants will be hit a lot harder than the larger,
established players. Mergers or takeovers, if they occur, are more likely to be as alternatives to bankruptcy filings rather than driven by sound fundamentals.

Mitchell: Access to funding has become more difficult than any period in my professional experience. Ultimately, the credit markets will open up, but this will be a slow and uneven process. The first companies the credit markets will open up to will be ones that have strong cash flow and strong balance sheets — or the ones that need it the least. The second group of companies it will open up too will be companies that may not be the highest credit quality, but which do a lot of business with the banks. Banks will lend to them to them to protect that sources of fees. However, somebody who is looking for financing to get something off the ground could be in trouble.
Watts: No company will be immune.

SHOW DAILY: Craig Moffett, managing director of Sanford Bernstein, said in late 2008 that, “We are heading into a nuclear winter of funding.” Do you agree with this statement?

Mechanick: If true, I think we may have already exited it, although the landscape still may not be much improved. Funding will be available for those prepared to pay the full freight, but the terms and conditions will be much more stringent than before.

Mitchell: I think it will be very, very tough to get funding for new ventures and distress properties, but at the same time, you will have companies like DirecTV and the Dish Network who will have access to credit. Access to capital really has a lot to do with the characteristics of the borrower. Funding is tight, but I think for companies with good cash flow characteristics and strong balance sheets, there will be financing out there.

Watts: I do agree with Craig. While credit markets have improved for investment grade issuers, lower quality companies will face significant challenges in finding capital.

SHOW DAILY: Do you expect to see more satellite players enter bankruptcy?

Mitchell: Probably. The issue with satellite-based services is they have a very high fixed-cost basis, and because of that, many of these companies have very heavy debt levels, and with the credit markets virtually closed, any company that needs to refinance because of maturities is
basically out of luck. In general, any company which is not fully funded or requires large amounts of capital or which needs to ride out large losses in the beginning is at risk of not being viable in this environment.

Watts: I have high levels of confidence in Sirius XM as a business. It’s only its balance sheet that presents a challenge, however, I am less optimistic about satellite audio in other parts of the world. New technical approaches to audio using piggyback payloads may lower the costs to enter the business. Nevertheless, the tremendous cost of developing terrestrial repeater networks and funding receiver development make the success of satellite audio outside North America unlikely.

SHOW DAILY: Which sectors of the satellite industry do you expect to perform strongly?

Mechanick: One positive thing that can be said about the satellite industry is that, given its somewhat cyclical nature, it is already well acquainted with the rigors of weathering financial storms and downturns, therefore, the current challenge, while significant, may not necessarily be that shocking. Probably the fixed satellite services side will be the least affected, whereas the DTH content providers may be susceptible to diminished market demand from customers who view such services as dispensable discretionary spending in difficult economic times. Mobile satellites services are probably the biggest question mark, falling somewhere between second-generation start-up retreads and cutting edge early adapters. The other question mark for the industry as a whole is whether the satellite industry will benefit in any appreciable manner from the broadband component of the stimulus package being formulated on Capitol Hill. Notwithstanding the very significant potential that satellites, both in the fixed and mobile arenas, can offer in the rapid creation of broadband infrastructure, particularly in less populated areas, they continue to be relegated to second -class status whenever broadband deployment is touted.

Mitchell: Within the companies that I cover, I am fairly optimistic about the prospects for both DBS platforms. The value proposition they both present to the consumer is very strong in terms of the content they offer, the price they charge for it and importantly, the level of customer support the offer in conjunction with it. DirecTV is clearly outperforming its peer group, and I believe we will see the Dish Network regain some of its momentum this year as well. There is no question about the long-term viability of these companies, but valuations are at an all time low for both, particularly the Dish Network. I am very much a bottom fisher, and these are very interesting times for some one like me.

Watts: Satellite TV is the standout. DirecTV just reported an excellent quarter. As consumers look to save money, DirecTV and Dish offer exceptional promotions that encourage customers to abandon cable.

SHOW DAILY: Will Harbinger move the consolidation of the mobile satellite services (MSS) industry along by combining Inmarsat with SkyTerra?

Mechanick: It is an extraordinarily logical and savvy move, especially since both operate at L-band and consolidation in the MSS space is both an absolute necessity and a foregone conclusion. The groundwork for this initiative in fact was laid by the recent thawing of what previously had been a very chilly relationship for many prior years between Inmarsat and SkyTerra. I would be somewhat surprised if this transaction fails to move forward in 2009. The real issue is whether other shared band players will follow suit.

Watts: We have seen private equity investor Apollo play a major role in the satellite industry where spectrum rationalization can create value. Other investors have also shown interest. Having as high a profile investor as Harbinger, which can make things happen, elevated the status of the whole ATC sector. Moreover, finding some solution to the Inmarsat-SkyTerra spectrum issues made perfect sense. Although Harbinger is
reportedly feeling pressure in its other investments, I still look for this combination to go forward. This will shift the market’s attention to how to create value with the remaining ATC spectrum holders.