Moody's affirms some Loral ratings cuts others
Thursday June 24, 9:58 am Eastern Time
(Release provided by Moody's Investors Service)
NEW YORK, June 24 - Moody's Investors Service assigned a Ba3 rating to the $500
million in credit facilities for Globalstar, L.P. which are being guaranteed, on a senior secured
basis, by a subsidiary of Loral Space & Communications Ltd. (''Loral'').
Moody's confirmed the ratings of Globalstar's $1.45 billion of senior unsecured debt at
Caa1 and the ''caa'' rating on the $350 million convertible preferred stock issued by
Globalstar Telecommunications Ltd. Moody's also confirmed Loral's $350 million 9.5% Senior Notes at B1, as well as Loral's
$600 million 6% convertible preferred stock at ''b3.'' However, Moody's downgraded the two Loral Orion issues ($443
million 11.25% Senior Notes and the $484 million 12.5% Senior Discount Notes) to B2 from B1.
Further, the outlook for the Loral and the Loral Orion ratings have been changed to negative from stable. The Ba3 rating on the
new Globalstar bank facility reflects the benefits of the guarantee from a Loral subsidiary as well as the collateral package that
secures that guarantee.
However, the extension of this guarantee, as well as the provision of Loral assets as security, limits Loral's financial flexibility
prompting the change in ratings outlook. This additional pressure, combined with the recent loss of the Orion 3 satellite,
prompts the downgrade of the two Loral Orion senior notes.
This $500 million bank financing may not represent the final round of outside capital that Globalstar will require. Instead this
amount reflects only the funds necessary before the commencement of commercial service expected in September of this year.
To meet this timetable, Globalstar must launch another 8 satellites over the course of the next three months, and to this end the
company has scheduled four launches of four satellites each: two in July, one in August, and one in September. After the
commencement of commercial service, Moody's expects Globalstar to require approximately $350 million of additional
financing before the company expects to produce positive cash flow.
Part of this requirement can be met through Globalstar's already committed $250 million credit facility (undrawn to date) that
expires in December 2000, as well as through additional vendor financing. With Iridium currently failing to attract sufficient
subscribers to make that project viable, the market for satellite-based telephony services remains unproven.
Globalstar must avoid the mistakes that Iridium has made in rolling out its service, and develop the market for satellite-based
mobile telephony. The development of this market is likely to take time, especially given the initially limited deployment of 9
Globalstar gateways to cover 16 countries, although Globalstar expects to have 22 gateways installed by March 2000 covering
80 countries.
By supporting this new $500 million bank facility, Loral is providing 100% of the financial support Globalstar will require by this
September. Given Loral's currently high leverage, and as the company is not currently in cash generative state of operations,
this support for Globalstar and Moody's expectation that Loral will continue to financially support Globalstar puts stress on the
Loral ratings.
Loral is building and launching five new satellites over the next two years and until Loral is able to lease a substantial amount of
that new satellite capacity, the company's core operations will continue to consume cash. Due in part to its relatively short
history as it is currently organized, Loral has a complicated capital structure with senior unsecured debt at the ultimate parent
holding company, secured debt at a subsidiary, as well as two unsecured notes at another wholly-owned subsidiary.
This arrangement of debt obligations combined with the near term cash requirements of most of Loral's subsidiaries limits the
company's financial flexibility. The use of that flexibility to support its Globalstar investment has prompted this change in ratings
outlook from stable to negative.
The failure of the Orion 3 satellite to be placed in a useful orbit delays the generation of revenue and cash flow from its orbital
slot for about two years. Loral Orion was insured for this failure and will receive $265 million of insurance proceeds that may
be used to repay Loral Orion bondholders or to replace the satellite.
In the meantime, Loral Orion is also consuming cash and requires additional funding. While Moody's continues to expect Loral
(the parent) to support Loral Orion, as the parent's financial flexibility becomes more limited, its ability to support Loral Orion
becomes constrained.
On this basis, Moody's has downgraded the two senior unsecured issues of Loral Orion to B2 from B1. The Loral subsidiary
that will guarantee of the new $500 million Globalstar credit facility is Loral SatCom Ltd. (''SatCom'').
This entity owns two geosynchronous satellites, Telstar 6 and Telstar 7, both of which provide coverage of North America.
Telstar 6 was put in service in March of this year and Telstar 7 is expected to be launched in the third quarter of this year. The
SatCom guarantee will be secured by those two satellites and any benefit from cash flow generated by leases for capacity
thereon, as well as the stock of SatCom held by Loral.
Notably, this Globalstar credit facility does not contain minimum subscriber covenants. The negative outlook on the Loral and
Loral Orion ratings is largely a function of the Loral's reduced financial flexibility in combination with the near term capital
requirements of its core operations, including Loral Orion, as well as Globalstar.
The success of Globalstar in acquiring subscribers and attracting third party capital or support to relieve Loral of its current and
future obligations to support this venture would have positive ratings implications. Moody's cautions, however, that while Loral
is expecting cash flows from its core satellite manufacturing and transponder leasing business to grow fairly rapidly, material
shortfalls from these growth targets and/or the requirement of additional financial support for Globalstar could negatively affect
the company's ratings.
Loral Space & Communications Ltd., is a leading satellite communications company with interests in the design, manufacture,
and operation of satellite systems. Loral owns approximately 43% of Globalstar, a satellite-based mobile telephony project.
Related News Categories: IPOs, options, US Market News
Help
Copyright © 1999 Reuters Limited. All rights reserved. |
