Northern Sky Research

Telesat’s Debt Roller Coaster

Mar 6th, 2012

In early March 2012, news broke that Telesat would be seeking $2.55 billion in new loans. The majority of the loans would be used for refinancing existing debt; however, the company also announced that it would pay a $705 million “special dividend” to its shareholders, primarily Loral Space & Communications and the Public Sector Pension Investment Board of Canada. This is a reversal of management statements from 2011, following calling off attempts to sell the company, that the Telesat would not seek a debt-based recapitalization.

While many of Telesat’s competitors were quick to shake their heads at this about face, Telesat’s management noted that the special dividend payment would only add about $530 million in new debt to the company according to press reports. In support of Telesat’s position, an analysis of Telesat’s Net Debt to Adj. EBITDA ratio based on data from NSR’s recently published “Satellite Operator Financial Analysis” study, as well as recently released annual reports for 2011, largely supported this contention.

As can be seen from the following chart, Telesat’s Net Debt to Adj. EBITDA ratio sky rocketed between 2006 and 2007 following its purchase by Loral and PSP Investments. In the subsequent years, increasing earnings and a strong push to seek cost efficiencies by Telesat’s management allowed the satellite operator to reduce its debt levels from their peak in 2008. This translated into a significant drop in Telesat’s Net Debt to Adj. EBITDA ratio from a high of 7.68 in 2008 to 4.10 as of the end of 2011. Telesat’s score in this metric in 2011 indicates that it was approaching the Net Debt to EBITDA ratio of its main industry peers, SES and Eutelsat. NSR recognizes that comparing Telesat’s Net Debt to Adj. EBITDA ratio to that of Net Debt to EBITDA for SES and Eutelsat is not a perfect apples-to-apples approach; however, NSR accepts that the Adj. EBITDA measure is a fair metric for Telesat given its substantially different financial structure compared to the publicly traded SES and Eutelsat.

Bottom Line

Going the final step, NSR estimates that Telesat’s Net Debt to Adj. EBITDA ratio will likely remain under 5.0 as of the end of 2012. This supports its management contention that the added debt burden taken on to pay out the special dividend is manageable and will not turn back the clock on Telesat’s leveraging to the much higher levels seen in 2008. Further, NSR expects that Telesat will continue to grow its revenues and real EBITDA in the coming years with the launch of its Nimiq-6 and Anik-G1 satellites. Plus, the company will no doubt continue its drive to improve operational performance.

If there is one issue to raise, this would be that Telesat may be reaching a limit on improvements in operational efficiencies. For example, Telesat’s employee base has shrunk by about 30% since 2006, and one would have to assume that most of the obvious efficiencies have been rung out of Telesat by now. Nonetheless, NSR does contend that, as the Nimiq-6 and Anik-G1 enter operation in the coming years, the roller coaster ride of Telesat’s debt will take a turn for the better as the company again starts to pay down its debt and send its Neb Debt to Adj. EBITDA ratio once more on a downward track.