By Mark Holmes

Despite a difficult 2009, 
the satellite industry appeared to fairly resilient. The Satellite 2010 Show Daily spoke to Andrea Maleter, technical director, Futron; Maury Mechanick, counsel with White & Case; and Hoyt Davidson, managing partner, Near Earth LLC about the financial state of the satellite sector and what to look for in 2010 and beyond.

SHOW DAILY: How would you assess the financial state of the satellite sector?

Maleter: The satellite industry is actually quite financially sound, with solid results for 2009 (at least those already reported). The economic recession seems to have been eclipsed by a few key trends, notably HDTV growth, continued military and other government business.

Mechanick: All things considered, the health of the industry is, frankly, pretty good. The economic recession has certainly had some impact, primarily manifested by cash flow strains attributable to delayed payments and increased bad debts, but so far, at least, has not produced the massive disruptions that have plagued other business sectors.

Davidson: The financial state of the satellite industry is quite strong, and I think its performance during the 2008/2009 “Great Recession” surprised many investors, but not us. We have been preaching to institutional investors for years now the recession resistivity of the satellite industry and its low correlation to the general economy.

SHOW DAILY: How big a problem will access to funding be in 2010?

Maleter: While some of the more traditional funding sources have been difficult, the most interesting story has been the emergence of export/credit financing as a resource not just for start-ups but for established players like SES. The French, through Coface, have been particularly aggressive in supporting their industrial base.

Mechanick: While the trend in the financial markets will be in the direction of greater openness, funding will continue to be somewhat tight, which is one of the reasons that there will be continued resort to export credit agency (i.e., Exim Bank, Coface) funding whenever possible, even for operators that in the past would not necessarily have moved in that direction.

Davidson: The investment grade and high-yield debt markets are open to satellite companies where cash flows will support leverage, especially for refinancings of more expensive debt. … We would not expect to see many negative cash flow businesses close debt financings this year other than export credit agency backed loans for new satellite construction. Bank lending is expected to be better than 2008/2009 but remain constrained through much of 2010, especially for small and midcap companies, which is pretty much the entire industry.

SHOW DAILY: Will the MSS sector find financing?

Maleter: MSS is an area that continues to confuse me, because I have been expecting a reduction in the numbers of players for years now, yet somehow — mostly because of the willingness of a couple of high net-worth individuals to keep investing — companies with no customers, no market presence, sometimes not even a satellite, just keep going. I’m not sure where they are going, but at some point it would seem to me that there will be an exit strategy put into place. Other than that, Iridium seems poised to get financing of one sort or another, and as one of two MSS companies with real market growth (Inmarsat being the other), they should be in good shape.

Mechanick: The MSS sector could be on the verge of a repeat performance of the events of 10 years ago, although for slightly different reasons. The massive MSS failure of the last decade was predicated on a cataclysmic misperception of customer demand leading to unsustainable business cases facing each of the potential operators individually as well as collectively. This time around the individual business cases show a much greater degree of sophistication and coherence. On a cumulative basis, however, there may again be much more available capacity than is sustainable on a demand basis, and it remains to be seen whether the ultimate outcome will be some winners and some loser or a downward death spiral in which all wind up as losers again because of such dramatic overcapacity. The additional cost element related to potentially duplicative ATC infrastructure rollout activities may only make the situation worse.

Davidson: Following on the Globalstar Coface-backed debt financing, we would expect to see an even larger export credit agency backed debt financing for Iridium this year, perhaps in a few months. With its Series A and B preferred stock coming up for redemption in April, the Terrestar balance sheet is ripe for restructuring, but the timing and nature of a financing is really controlled by its major shareholders, principally Harbinger and EchoStar. We would expect Terrestar to continue to be supported by its major shareholders given its operational progress and the significant value of its ATC spectrum.

SHOW DAILY: What were the biggest stories in 2009?

Maleter: Coface and ExIm financing of multiple satellites/programs represents a major change in financing, as well as a focus by governments on protecting the space industrial base; ProtoStar satellite auctions/sales because of the bankruptcy that forced this and because of the new initiatives at least one of them is being used for; and the Sea Launch acquisition, partially because the new owners are “new” space people rather than traditional space companies.

Mechanick: Globalstar’s funding, most noteworthy because apparently no one saw it coming, and it was executed brilliantly; and the ProtoStar auction results, most noteworthy because a company forced into bankruptcy possessed assets with such substantial market value, albeit only capable of being realized through the bankruptcy auction process.

Davidson: The biggest move would have to be ViaSat acquiring WildBlue. That move firmly establishes ViaSat as an integrated equipment and service provider like Hughes Network Systems. As for biggest financing, the one with the most strategic impact was the $586 million Coface-backed debt financing for Globalstar. Without that financing, Iridium might soon have been the only LEO-based MSS company. One of the big news stories for the commercial satellite industry was the regulatory blowup at ProtoStar and its subsequent dismembering. This was a real shocker and almost without precedent, and yet it was a plus for the industry that the satellites were sold at reasonable prices versus a fire sale. However, the news story with the biggest potential impact on commercial space is NASA’s new budget. Billions of dollars are being reallocated from the Constellation program to support a manned return to the moon to a flexible path approach to missions and destinations. What this really means is more money for robotic exploration and science and a shift to supporting commercial (i.e. fixed priced) contracting with private capital at risk from traditional government contracting with aerospace primes on a cost plus basis. For satellite manufacturers and launch providers this probably means a larger number and greater variety of NASA satellites and missions.