This week, Durig Capital takes a second look at a leading global satellite company. Intelsat is the world’s leading satellite operator in terms of capacity and geographic reach. The company has released its Q4 and full year 2017 results. Here are some of the highlights:
- Improved adjusted EBITDA margin for 2017 to 77%, from 2016 levels of 75%.
- Q4 net cash provided by operating activities of $22 million.
- Contracted backlog as of December 31, 2017 was $7.8 billion.
- Interest coverage of 1.5x.
- Robust cash on hand of $525 million.
Intelsat has been garnering significant interest lately due to a proposal it gave the Federal Communications Commission to open up access to the C-band spectrum for mobile operators looking to drive 5G availability and adoption. If accepted, this proposal could prove very lucrative for satellite operators, including Intelsat. The company’s June 2021 bonds, are now yielding a fantastic 27+% and are currently represented in our Distressed Debt Fund and would be ideal for additional weighting in Durig Capital’s FX2 managed income portfolio, the recent aggregated benchmark performance of which is shown below.
Q4 and Full Year 2017 Results
According to Intelsat’s commentary on its Q4 and full year 2017 results, the company’s performance in Q4 was in line with expectations.
- Q4 adjusted EBITDA of $416 million was virtually unchanged from Q4 2016 at $417 million, with adjusted EBITDA margin coming in at 77% of revenue for Q4.
- Full year 2017 adjusted EBITDA was $1.66 billion, a nominal improvement over 2016 adjusted EBITDA of $1.65 billion.
- Full year 2017 adjusted EBITDA margin of 77%, an improvement from 2016 margin of 75%.
- Q4 net cash provided by operating activities was $22 million.
Perhaps the most impressive metric from Intelsat’s most recent results is the company’s massive backlog. Contracted backlog as of December 31, 2017 was $7.8 billion, which represents expected future revenue under existing contracts with customers. Intelsat believes this backlog provides a solid foundation for future revenues.
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.
On October 2nd, 2017, Intelsat and technology giant Intel submitted a joint proposal to the United States Federal Communications Commission (FCC) that would expand the use of 3700-4200 MHz C-band spectrum to terrestrial mobile services. If the FCC adopts the proposal, terrestrial wireless operators would be able to leverage mid-band spectrum alongside satellite operators, who historically have resisted such sharing agreements due to concerns about interference. The proposal would see current spectrum licenses unchanged, still controlled by the satellite companies like Intelsat. Satellite companies would coordinate with terrestrial mobile operators to clear sections of the C-band in specific geographic areas, mostly centered around major metropolitan areas where operators seek the densest coverage.
In late February, Intelsat’s stock spiked, related to comments by current FCC Chairman Ajit Pai at the Mobile World Congress in Barcelona. Pai said he “plans to propose the next steps needed to make the 3.7 to 4.2 GHz band available for commercial terrestrial use.” Clearance by the FCC to use portions of the C-bank spectrum for mobile operators could prove very lucrative to satellite companies like Intelsat.
New Contracts Signed
Intelsat continues to attract new customers as well as renew and incrementally increase business with existing customers. Some of Intelsat’s new / renewed contracts include the following:
- Romania Cable Systems / Data Systems signed a multi-year agreement.
- A&E Lifetime Networks renewed its contract into the next decade.
- Saudi Telecom signed a multi-year renewal agreement for incremental services on two Intelsat satellites.
- KVH signed a new, multi-year contract that more than tripled its original commitment.
- A recent five-year strategic agreement with a government contractor to provide satellite requirements for its major programs.
- Intelsat signed a long-term agreement with a leading Asian wireless operator to expand its wireless infrastructure and enhance disaster recovery capabilities.
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.
A recent report estimates the global mobile satellite services market will grow to USD $5.53 billion by 2024. Rising demand for advanced services that facilitate the sending and receiving of information from any remote location, even in the absence of necessary infrastructure will drive this growth. In addition, the use of satellite communications in the case of disaster management is also expected to boost the demand for satellite services.
Interest Coverage and Cash
For the quarter ended December 31, 2017, Intelsat had operating income (without the effect of Depreciation and Amortization charges) of $406.3 million and interest expense of $264.6 million. This equates to an interest coverage ratio of 1.5x.
The company also has a robust cash level. As of December 31, 2017, Intelsat had cash on hand totaling $525 million.
The risk for Intelsat bondholders is directly related to the company’s ability to continue to generate momentum – this means increasing revenues while holding down costs, improving its balance sheet and continuing to press the FCC on its decision on C-band availability for mobile operators. The C-bank situation looks promising as the current FCC Chairman appears to be on board with the proposal based on recent comments. Also, Intelsat was recently able to refinance and extend maturities for its secured term loan facility, pushing out the maturity dates to 2023 and 2024. In light of these considerations, the yield-to-maturity of over 27.5% on Intelsat’s 2021 bonds does appear to outweigh the risks identified.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
After its most recent earnings release, Intelsat stock unexpectedly shot up. It would appear the market is getting excited about the prospect of the FCC approving its proposal to share C-band spectrum with mobile operators. If the proposal is approved, this could prove to be a significant revenue generator for Intelsat. Additionally, the company’s massive contracted backlog is essentially 3+ years of revenues (at 2017 levels). Between the company’s backlog, current cash levels, as well as the potential C-band ruling in its favor, Intelsat looks to be a strong and viable company. The company’s 2021 bonds, couponed at 7.750% and with a yield-to-maturity of over 27.5%, are currently represented in the Distressed Debt 1 Hedge Fund, and are ideal for additional weighting in Durig Capital’s FX2 managed income portfolios. The most recent tear sheet for Distressed Debt 1 is displayed above.
Issuer: Intelsat Luxembourg SA
Rating: Ca / CCC-
Yield to Maturity: ~27.65%
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Disclosure: Durig Capital and certain clients may hold positions in Intelsat’s 2021 bonds.
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