dollars and sense
By Owen D. Kurtin
Dealing With
The Credit Crisis
there has been plenty of gloom in the first months of
2008 stemming from the credit crisis born of the subprime
mortgage meltdown and the end of easy and cheap debt
financing that underpinned the highly leveraged private equity
transactions that transformed the satellite sector starting in
2003. Nevertheless, a series of satellite industry transaction
closings has demonstrated that the sector remains vital, is
outperforming the transactional market, and that smarter
and more patient dealmakers know that a new set of financial
market conditions offers new opportunities.
When the credit crunch began last summer, many print
and electronic media commentators asserted this meant
the end of highly leveraged buyouts, the unavailability of
debt financing — especially of low interest debt, the end of
so-called “covenant-light” debt packages and the demise of
payment-in-kind, or PIK notes. While those trends are broadly true, they are counterbalanced by other capital markets
and trade movements.
For one, the U.S. Federal Reserve Bank, the country’s
central bank and monetary policy maker, has embarked on
what is likely to be a series of interest rate cuts that should
loosen the availability of debt finance for a flight to quality. In other words, while easy credit for doubtful business
plans may be harder to obtain, the capital on the sidelines
will be all the more available for companies and business
plans with traditional debt-to-equity ratios, financial covenants, debt service and guarantors.
Also, interest rate cuts weaken the already weak dollar.
This is terrible news for U.S. tourists but good news for satellite industry exporters, whose prices are flattered compared
to the euro, pound sterling and yen and whose products are
therefore more competitive than non-U.S. manufactured
products and services, whose costs are incurred and prices
set in those currencies. This column
previously has noted that the weakening dollar of the last few years has
helped offset what would otherwise
be a more obvious regulatory burden and competitive disadvantage
imposed by the International Traffic
in Arms Regulations of the U.S. State
Department, the Sarbanes-Oxley Act
of 2002 and other U.S. legislative and
regulatory barriers.
Owen D. Kurtinisa
partner in the New
York officeoflaw firm
Dickstein Shapiro
LLPandamemberof
thefirm”s Corporate
& Finance Practice.
Hemaybereachedat
+1.212.277.6770 or
bye-mail at kurtino@
dicksteinshapiro.com.
Beyond those considerations, a close look at the economic data offers a mixed picture. As of this writing, at
least, the March meltdown of investment banking firm Bear
Stearns & Co. caused substantial capital markets volatility but not a sustained decline. The U.S. Federal Communications Commission’s 700 MHz auction closed and set
records for spectrum licenses, arguably validating some
of the spectrum-based valuations given to mobile satellite service (MSS) providers whose key assets are those
licenses.
The MSS business plans themselves continue to develop
in the face of market turmoil, with several of the players
completing new financing rounds. The near pan-MSS sector
investment by Harbinger Capital Partners is an interesting
development for the satellite sector. Harbinger’s investment
with Echostar Corp. of $300 million in MSS operator Ter-restar and contribution of L-band spectrum indicates deals
are getting done in the current climate — at least in this case
— even with supposedly discredited PIK notes.
In the same time period, the Loral-Telesat and Intelsat-BC
Partners transactions closed, continuing the consolidation
of the fixed satellite service (FSS) sector. Both deals were
committed before the credit crisis began, and therefore are
not necessarily bellwethers of transactional viability in the
new climate. But the pre-closing debt package revisions in
the Intelsat deal were not extreme and may be further proof
that quality transactions may not be harmed, and may even
be facilitated, in a tighter credit market as investors more
critically separate the wheat from the chaff.
In addition to demonstrations of FSS and MSS sector
vitality, rapid service offering and technological developments are driving the broadband, Earth imaging and turnkey
network solutions sectors. The exploration of the satellite
broadband market and its fit, complement and competition points with terrestrial broadband service is going to
be one of the main stories of the second half of this decade.
On the manufacturing side, there have been several interesting transactions in the small-satellite and subsystems
industries.
Throughout the rest of the year, this column is going to
focus intermittently on several of these often-less-report-ed-upon subsectors. The message: the credit market may
be in turmoil, but this is not 2001-2002. The satellite sector is thriving.
