Intelsat cut net debt by $475 million in 2014, but has no debt-cutting plans for this year

By Paul Deckelman

New York, Feb. 18 – Intelsat SA said Wednesday that it had cut its net debt level by $475 million in 2014.

But the Luxembourg-based communications satellite company told analysts on its conference call following the release of its results for the 2014 fourth quarter and fiscal year ended Dec. 31 that it has no plans for any major debt-cutting this year, citing expected reductions in revenues and EBITDA.

“Our interim financial performance will be shaped by ongoing headwinds, which are expected to persist this year and into next,” chairman and chief executive officer David P. McGlade said, projecting that “in this context, our outlook for 2015 total revenue is $2.33-to-$2.38 billion, a roughly 5% decline from 2014.”

McGlade said that some of the headwinds are specific to the company, such as channel and other trunking services reaching the end of their product lifecycle, while others are macro forces over which Intelsat has no control, including the strengthening dollar and anticipated withdrawals of United States military forces from Afghanistan, which will result in a lesser need for satellite communications services by the Pentagon, one of Intelsat’s major customers.

He said that the company will “take these realities into consideration as we continue to make progress on our long-term goals.”

“Given our reduced expectations, our ability to de-lever materially is limited in 2015. Down the road, we will re-assess our capacity to de-lever as growth returns.”

In the meantime, he said, “it is important to note that we have a fully funded business plan. Even with our current outlook, there is sufficient expected cash flow to execute the capital investment plan outlined by our guidance and to service all debt obligations.”

Bond debt dominates structure

As of the end of the fourth quarter, the company’s long-term debt stood at $14.76 million, net of current portion debt, which came to $49 million. Cash and equivalents totaled $123.15 million.

During the fourth quarter, the company’s Intelsat Jackson Holdings SA subsidiary redeemed all of the outstanding $500 million of its 8½% senior notes due 2019. The redemption took place on Nov. 1 at a price of 104.25 plus accrued interest up to the redemption date and was paid for using general corporate funds. The company said at that time that it was on track toward its goal of reducing its debt by $475 million, including $24 million of amortization payments to be made under the credit facility of a joint venture.

According to Intelsat’s latest 10-K filing with the Securities and Exchange Commission, its capital structure as of Dec. 31 mostly consisted of junk-rated senior notes issued by Intelsat Jackson and another subsidiary, Intelsat (Luxembourg) SA.

Intelsat Jackson had outstanding $1.5 billion of 7¼% notes due 2019, $2.2 billion of 7¼% notes due 2020, $1.15 billion of 7½% notes due 2021, $1,275,000,000 of 6 5/8% notes due 2022 and $2 billion of 5½% notes due 2023.

Intelsat (Luxembourg) had outstanding $500 million of 6¾% notes due 2018, $2 billion of 7¾% notes due 2021 and $1 billion of 8 1/8% notes due 2023.

Besides the outstanding bonds, Intelsat Jackson had $3,095,000,000 of term loan debt outstanding under a senior secured credit facility due 2019 and $49 million of outstanding revolving credit borrowings.

In late November, Intelsat and its lenders had extended the maturity of $450 million of its $500 million revolver by 1.5 years to July 2017, leaving the other $50 million tranche unextended under the original January 2016 maturity, with any borrowings thus classified as current debt once the new year arrived.

No immediate debt plans

The company said in a statement Wednesday that it had paid that $49 million of outstanding unextended current maturity revolver debt last month, but added that based on the guidance it had released, “Intelsat expects no further material debt repayment in 2015.”

During the question-and-answer portion of the call following the formal presentations by McGlade and the company’s deputy CEO, Stephen Spengler – who will take over the reins as CEO on April 1, with McGlade remaining as non-executive chairman – an analyst noted that in the past the company had talked about a long-term leverage target of debt at 6 times EBITDA, and he asked Intelsat’s chief financial officer and executive vice president, Michael R. McDonnell, whether the company might temporarily put that goal aside, given its lowered expectations for 2015, and revisit it further down the road.

McDonnell said that “when you think about our business right now, we have a fully funded plan, we have an enormous amount of room in all of our maintenance covenants, so we’re very comfortable there, and we also have a lot of opportunity in 2015 with about $4.2 billion of debt that becomes callable. So we’ll look at the rate environment and so forth as those issues become callable, beginning in April, and see where we go.”

However, he added “I think that overall, I would acknowledge that the 5 or 6 times is a good ways out at [having to eliminate] $2 billion per turn, and the lower EBITDA level obviously makes that bar higher.”

He said that Intelsat’s main focus in the short term is getting new satellite capacity on line, particularly in the form of its new “Epic” generation of satellites, “and returning to growth that way.”

No major interest savings seen

Another analyst asked whether the company might look to do some capital market transactions, replacing its existing debt with new debt with an eye toward lowering its coupon rates and interest costs, or whether it would be more interested in merely extending the debt’s maturity.

McDonnell replied that “when you look at the trades that we can do in the debt markets that really produce significant amounts of interest savings – those trades are complete.”

He said that the pricing on Intelsat’s current debt “blends out to about 6.3% or 6.4%.”

Relative to where the market sits, he said, “there can be some opportunities, depending on where rates sit, to save some interest dollars, and we would certainly be interested in doing that if that opportunity is there,” though he acknowledged that this would “obviously not [be] on the magnitude of some of the prior trades.”

“So I think it would be a mix of both interest savings and maturity management, but the interest savings piece would obviously be significantly less, given where the capital structure sits today relative to the current rate environment.”

When asked about free cash flow for the next few years, the CFO declined to give any estimates. He said that the company would be free-cash-flow positive this year – not putting a specific number on it but agreeing with an analyst’s conclusion that it would be at least “modestly positive.”

As for beyond 2015, “that only gets better if we’re going to grow in the future,” he added.

© 2015 Prospect News.
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