This week’s we look toward space, where this week’s bond issuer focuses its energy and resources. Intelsat is the world’s leading satellite operator in terms of capacity and geographic reach. The company has had a busy 2016, with several exceptional developments, including;
Debt reduction in the amount of $704.2 million,
Extending of its debt maturities (its next debt maturity is not until 2021).
Successful launch of four additional satellites, and
Q3 2016 net income of $195.6 million versus $78.0 million a year earlier.
Intelsat has an astounding revenue backlog of $8.9 billion as of September 30, 2016. In addition, the company has a superb level of cash of $958 million. The company’s June 2021 bonds, indicating a scorching 40+% yield to maturity when priced around 35, are currently represented in our Distressed Debt Fund and are targeted for addition to both our FX1 and FX2 global high yield income portfolios.
According to Stephen Spengler, Chief Executive Officer of Intelsat, the highlight of the third quarter for Intelsat was the successful launch of its Intelsat 36 and Intelsat 33e satellites. The successful launch of these two satellites brings the total of successful launches in 2016 to four. But perhaps the most stunning figure from Q3 is Intelsat’s impressive and massive revenue backlog of $8.9 billion. This represents expected revenues due to the company under its existing contracts with its customers.
In addition to the successful launches of 4 new satellites, the company also posted some remarkable results for its latest quarter. Intelsat registered Q3 net income of $195.6 million compared to Q3 2015 net income of $78.0 million. This represents an outstanding year-over-year increase. It should be noted that a large component of this increase was a one-time gain on the early extinguishment of debt of $219.6 million. This resulted from a repurchase of debt, which we discuss later in this article.
Intelsat registered revenue for the quarter ended September 30, 2016 of $543 million. This represents an incremental increase over Q2 2016 revenue of $542 million. Although this may not seem significant, it is in the sense that this is the first time in a few years that Intelsat has posted any type of quarter over quarter revenue increase as seen in the following graph.
Intelsat contributed this incremental growth to two of its highly-contracted Direct-to-Home TV satellites launched earlier this year. This is encouraging as the company has put two more satellites up in Q3. One of those satellites is already operational and generating revenue and the second will be fully operational in Q1 2017.
In Q3, Intelsat booked nine new contracts, each representing additional incremental revenue to the company. These contracts represent continued business opportunities with some of the largest, most well known corporations in the world. These include:
Saudi Telecommunications Company, the largest telecom operator in Saudi Arabia,
Telstra, Australia’s leading telecommunications and media company,
Sonema, a leading provider of telecommunications services in Europe and Africa,
Discovery Networks International, a division of Discovery Communications, a leader in global entertainment, and
Airbus Defense and Space, Europe’s number one defense and space enterprise.
Perhaps the most impressive contract signed in Q3 was a new and expanded contract with Global Eagle Entertainment. The multi-year global connectivity solution will provide a 25% committed revenue increase as compared to the prior agreement. These new contracts should begin to affect revenues in Q4 and certainly in 2017.
Interest Coverage and Cash
For the quarter ended September 30, 2016, Intelsat had operating income (without the effect of Depreciation and Amortization charges) of $395.3 million and interest expense of $220.4 million. This equates to an interest coverage ratio of 1.6x.
The company also has an extremely robust cash level. As of September 30, 2016, Intelsat had cash on hand totaling $958 million.
Over the course of this year, Intelsat has worked consistently on managing its long-term liabilities, which has included buying back debt at a discount as well as exchange offers to improve the company’s maturity profile. As a result of these actions, the company’s debt between June 30, 2016 and September 30, 2016 has decreased by $704.2 million. In addition, Intelsat has been able to extend the maturities of several bond issues, effectively buying time as revenues recover towards historic levels.
In addition to the $704.2 million reduction as of September 30, 2016, the company also recently completed another exchange offer of its 6.75% 2018 notes. This exchange offer effectively issued new notes that do not mature until 2024, and repurchased those 2018 notes from bondholders who did not choose to exchange their notes.
About the Issuer
Intelsat operates the world’s first Globalized Network, delivering high-quality, cost-effective video and broadband services anywhere in the world. Intelsat’s Globalized Network combines the world’s largest satellite backbone with terrestrial infrastructure, managed services and an open, interoperable architecture to enable customers to drive revenue and reach through a new generation of network services. Intelsat’s fleet of more than 50 satellites provides the world’s most extensive and secure communications network. Thousands of organizations serving billions of people worldwide rely on Intelsat to provide ubiquitous broadband connectivity, multi-format video broadcasting, secure satellite communications and seamless mobility services.
Increasing Demand for Satellite Services
Our increasingly connected world affects nearly every major trend today – from the internet, mobile commerce and smart cars to wearable technology. Our increasing connectivity continues to impact virtually every aspect of how we live our lives. We as a society now have an expectation that we can instantly communicate with anyone, anywhere. However, delivering this type of hyper-connected experience remains challenging, especially considering that 40% of the earth’s population is still without broadband access. Additionally, bringing access to new markets or regions requires expertise and support that exceeds mere physical connectivity. Other factors, including a knowledge of local culture and geographies, regulations, licensing requirements and more, need to be negotiated and in place long before connectivity can be successfully delivered and maintained.
Enterprise networks—large private data networks that use satellites for connectivity due to geographic reach, efficient broadcast transmissions and reliability— represent one of the largest applications in Intelsat’s network services business segment. Northern Sky Research, an industry research firm, forecasts enterprise networks will grow to a $2.9 billion application by 2021, reflecting an anticipated six-year CAGR (compound annual growth rate) of 4 %.
Globally, growth opportunities for Intelsat’s network services business segment includes increased demand for internet, maritime mobility applications, aeronautical mobility, and high throughput capacity for fixed and mobile broadband applications for telecommunications providers and enterprise networks. These applications combined are expected to grow from a $4.5 billion opportunity in 2015 to a $7.1 billion opportunity in 2021.
The default risk is IntelSat’s ability to perform. The company appears to have turned the corner over the last few quarters in terms of revenue growth. With the additional satellites deployed over the course of 2016, 2017 revenues should see some healthy increases. In addition, the company’s active management of its long-term liabilities has been effective in decreasing the amount of long-term debt as well as extending the maturities of the debt still on the books. Finally, the company’s massive $8.9 billion revenue backlog represents an extremely healthy amount of future revenue under existing contracts with customers.
These deeply discounted 54-month bonds offer over a 40% YTM, and have a similar high yields and duration to other bond issues reviewed on Bond-Yields.com, such as the 45% W&T Offshore and the 32% Gran Colombia Gold bonds.
Summary and Conclusion
Intelsat provides vital connectivity to companies and individuals all over the world. It has successfully launched four satellites in 2016, with plans to launch an additional three in 2017. The company has strategically been able to reduce its long-term debt in 2016 by a whopping $704.2 million as well as extending maturities on bonds coming due in the next few years. It continues to sign new contracts with existing and new customers, as well as expand revenues from existing customers. These 54-month bonds are currently priced about 36.5, and off a blazing 40+% yield, as well as outstanding portfolio diversification and increased cash flow for income investors. Given the deeply discounted price and whopping yields, we believe these Intelsat 2021 bond will make a very attractive addition to both our Fixed-Income1.com and Fixed-Income2.com global high yield fixed income portfolios.
Issuer: Intelsat Luxembourg SA
Rating: Ca / SD
Yield to Maturity: ~41.75%
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Disclosure: Durig Capital, Distressed Debt 1 LP, and certain clients may have a position in Intelsat 2021 bonds.
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