Business is booming for satellite manufacturers as export finance support for the sector grows. Sarah Rundell reports.
Thanks to proactive export credit agencies (ECAs) cementing deals in support of domestic export sales, many satellite manufacturers have never been busier. According to law firm Milbank, Tweed, Hadley & McCloy, one-third of all satellite project financings in the past three years have featured ECA financing totalling more than US$6bn in loans and loan guarantees.
ECAs’ desire to support national champions, coupled with the strong fundamentals behind insatiable global demand for satellite communication, navigation and observation, has made satellite financing a compelling investment.
“Our market just keeps evolving,” says Pat McDougal at mobile satellite services operator Inmarsat which received a US$700mn direct loan from the US Export-Import Bank (US Exim) to develop its Global Express Ka-band satellite system last year. “We started out with ships then moved to planes. Our land-based operations began with governments and now we work for media and energy companies,” McDougal adds.
Leading the way are space-faring nations America and France. US Exim is likely to finish 2012 having invested a record US$1.4bn in satellite projects on behalf of US satellite and launch service providers. It also has a host of other projects awaiting final approval in the pipeline. The spending splurge is backed by the bank raising its overall lending limit from US$100bn to US$140bn in May, says Peter Luketa, global head of export finance at HSBC, who sees satellite growth as part and parcel of the global growth in infrastructure spending. “US Exim and Coface have ample capacity to support satellite projects,” he explains.
In the last six months, US Exim has backed start-up Australian satellite company NewSat and its Jabiru-1 venture after the company selected Lockheed Martin as prime satellite contractor; French ECA Coface came in on the deal when NewSat also signed with domestic launch provider Arianespace.
Elsewhere, US Exim signed its first satellite transaction with the government of Vietnam to develop a satellite programme supporting orders from Lockheed Martin. It also backed a US$922mn loan guarantee with Mexico for the construction of three Mexsat satellites in return for Boeing orders.
Coface has grown its support for satellite projects to€€4.6bn in the last three years and satellite financing now accounts for 7% of its total commitments. “Our exposure is now stable after three years of growth linked to the investment cycles for replacing in orbit capacity and the lack of liquidity driven by the financial crisis of 2008,” says Regine Schapiro, head of Coface’s telecoms and space division.
Going forward, new financing opportunities could include the growth in hosted payloads. This piggybacking, or hitchhiking, involves the utilisation of available capacity on commercial satellites by a third party. Placing a hosted payload on an existing satellite costs a fraction of the cost of building, launching and operating a new satellite and will become an increasingly popular option for governments and corporates. “Hosted payloads will open up another role for ECA finance,” predicts Maury Mechanick, telecoms counsel at law firm White and Case.
Other trends include expanding into new markets like Africa where rolling out fibre optic cable is challenging and internet access is the lowest in the world. “The distances and cost of rolling out telecoms solutions can be very difficult,” says Mike Peo at Nedbank in Johannesburg. “As the price point for satellites has come down, these projects have become possible.”
Despite US and French dominance, other ECAs backing their own domestic manufacturers are jockeying for position.
Last year the Chinese government launched a satellite for Pakistan from its mountainous spaceport in the Sichuan province. In an overall service, China provided training and observation stations in Pakistan and is now backing similar transactions for Venezuela, Nigeria, Laos and Bolivia.
“China is very focused on winning exports to promote its domestic satellite and launch industry,” says Peter Nesgos, a partner in Milbank’s space and satellite team.
Although developing economies are sourcing from China, US and European satellite operators needing more complex procedures and governed by strict regulation aren’t yet, says Inmarsat’s McDougal. If Canada’s satellite designer McDonald, Dettwile and Associates (MDA) successfully acquires US-based Loral Space and Communications it could prompt more ECA support from Canada’s Export Development Canada. Elsewhere, the Indian Department of Space, which plans 14 communications satellites between now and 2017, will want to source from its own growing satellite and launch sectors. Efforts are also underway to boost UK export finance support for the sector.
The space industry has grown by 9% between 1999 and 2007 and now the UK government wants its industry to account for 10% of the forecast £400bn world space market by 2030. Since UK Export Finance, formerly ECGD, significantly downsized its operations in the early 1990s, it’s had little capacity to back projects that could lead to orders for UK space manufacturers. “ECGD sold off the bulk of its business and has only been dealing with a small number of exporters which have nothing to do with new technology. It doesn’t have the resources to stay close to the people doing the interesting stuff,” says Jonathan Dames a partner in CMS Cameron McKenna’s infrastructure and project finance group. At the moment the only window to get support into deals is reinsuring portions of Coface’s deals, Dames explains.
However, even a rejuvenated UK Export Finance would struggle to compete with Coface in Europe, with its long track record and dominant role. “The UK is slowly waking up to the opportunity but the fire isn’t lit yet,” says Simona Ailes, senior director of corporate finance and investor relations at Inmarsat.
But for all ECAs’ success in financing the satellite industry, there are growing calls for less ECA-backed projects. The problem comes when established and profitable satellite operators, for whom access to commercial financing is relatively easy, draw on ECA support.
Inmarsat’s Ailes counters that ECAs play a role supporting new, riskier projects that require a leap of faith and won’t secure commercial bank finance. ECAs’ attractive terms that include fixed interest rates and long tenors make these kinds of projects possible, he says. “Raising finance from the debt or equity markets to replace or refinance satellites for proven and profitable projects is a no brainer,” he says. “But it takes between four and five years from the day you spend the first dollar in a project to the day you earn the first dollar. We announced our current programme in 2010, it is a new service going into new markets and not based on existing models. We expect to provide the service at the end of 2014 and along the way we will have spent US$1.2bn.”
More concerning is the fact that ECA enthusiasm for the sector means they are now in danger of backing constellations that don’t have a solid business case. If they unravel they would damage the industry. Fierce bidding between Coface and US Exim seeking deals for their domestic industries creates increasingly favourable terms. Operators negotiate with US and European manufacturers, and whichever ECA offers the most comprehensive terms “will impact their decision”, says White & Case’s Mechanick.
Here, the argument goes, the priority can be preserving jobs rather than the credit worthiness of the satellite operator. “ECAs need to make sure they pick viable, well-structured projects that don’t poison the well,” says Ailes.
Two Coface-backed deals are a particular concern; the projects financed have not proven to be as robust as originally thought. Earlier this year satellite manufacturer Globalstar, which secured a US$586mn guarantee from Coface in 2009 to fund its second generation of satellites by Thales Alenia Space and the launch of those satellites by launch services providers Arianespace, amended its Coface financing agreement to more flexible terms.
Its first repayment date will now be next year. Iridium Communications’ US$1.8bn project, financed in 2010 with a 95% guarantee from the French ECA in Coface’s largest ever telecoms deal is also causing concern in the market. “Both of these could be potentially damaging,” warns Ailes. As there was no export element to the Iridium project the US manufacturer couldn’t seek loans or guarantees from US Exim to help fund this project.
In their defence, ECAs insist that not every project that comes their way is financed and commercial viability is central to the decision. “All our main projects are presented in front of the Inter-ministerial Guarantee Committee for Foreign Trade,” says Coface’s Shapiro. “Each project is assessed as rigorously as if it was commercially funded; they won’t finance projects that can’t be repaid,” adds Milbank’s Nesgos who believes ECAs will step back from financing satellites once bank markets improve. Going forward they will have to weigh up new risks on the radar.
The chance of satellites colliding with space debris is increasing. There is no exclusion in insurance policies for this yet – insurers still pay out but the debris problem is getting worse.
Without ECA help, many satellites wouldn’t have been financed during the credit crisis. Despite the huge sums ECAs have pumped into the sector, satellite projects only account for a fraction of the support they give strategic aviation industries.
The wave of financing at below-market rates with favourable repayment terms has sparked alarm in the industry. With US Exim now as active as Coface and relentless demand for better communication, ECA support isn’t likely to disappear just yet.