TEXT-S&P cuts GeoEye to 'B-' from 'B+'
Overview -- U.S. satellite imagery provider GeoEye received notice that a U.S. government agency has elected not to exercise its full-year option for the EnhancedView service-level agreement (SLA) due to potential funding shortfalls. -- The National Geospatial-Intelligence Agency (NGA) is proposing a three-month option for the SLA with an additional nine-month option, pending availability of funding. We believe there is heightened risk of a significant reduction of revenues from the NGA in future periods. -- We are lowering the corporate credit rating on the company to 'B-' from 'B+' and lowering all issue-level ratings by two notches. -- The outlook is developing, indicating that we could lower the ratings further if GeoEye loses a substantial portion of future SLA revenues, or raise them if the risk of government cutbacks recedes. Rating Action On June 26, 2012, Standard & Poor's Ratings Services lowered its ratings on GeoEye Inc., including the corporate credit rating to 'B-' from 'B+'. The outlook is developing. We also lowered all issue-level ratings by two notches. In addition, we withdrew the rating on subsidiary ORBIMAGE Inc., as there is no debt associated with this entity. Rationale The rating actions reflect what we consider heightened risk of a substantial reduction of U.S. government revenues beginning in late 2012 or in late 2013, which, in our view, would severely reduce the company's profitability and cash flow generation. Accordingly, we have revised our business risk assessment to "vulnerable" and our financial risk assessment to "highly leveraged." GeoEye said it received notice from the National Geospatial-Intelligence Agency (NGA) that the government agency would not fully renew the EnhancedView service-level agreement (SLA) for the contract year Sept. 1, 2012 through Aug. 31, 2013. Instead, the NGA proposed a new three-month option, which it intends to exercise, providing service revenue to GeoEye from Sept. 1, 2012 through Nov. 30, 2012 of $39.75 million. The NGA also proposed an additional nine-month option for the remainder of the contract year through Aug. 31, 2013, providing $119.25 million of revenue. However, the agency said the second option is based on the availability of U.S. government funding. In addition, the NGA told GeoEye that it is proposing to change a cost-sharing agreement for the development of GeoEye-2, a new satellite scheduled to launch in the first half of 2013. Of the $181 million that the NGA previously agreed to fund, GeoEye expects that it will receive $111 million within the next 30 days. The remaining $70 million in funding depends on certain milestones being met, with no guarantees that funding beyond the $181 million will be provided. While the temporary SLA renewals would represent a modest increase in revenues from the NGA for GeoEye, we believe the developments indicate heightened risk of a substantial loss of revenue, amid an already uncertain environment for government spending. The EnhancedView SLA program accounted for $147 million of GeoEye's revenues during 2011 (approximately 41% of total revenue), and U.S. government revenues in total represented $228 million (64% of total revenue). Therefore, we believe the loss of most of this business would cause GeoEye's credit metrics to deteriorate substantially. As of March 31, 2012, the company's adjusted leverage was at 3.4x, but this measure will rise substantially if the NGA does not renew the SLA due to potential funding shortfalls. The high operating leverage inherent in the satellite imagery business implies that nearly all lost revenue from a loss of the EnhancedView contract would detract from EBITDA, unless GeoEye can win additional business from non-U.S. government or commercial customers to use available capacity on its satellites. Liquidity We consider liquidity "adequate" based on current sources and uses, but this assessment could change in the next year depending on the outlook for future renewals of the EnhancedView SLA. Sources of liquidity include $181 million in unrestricted cash and short-term investments as of March 31, 2012, and funds from operations we assume to be around $110 million per year (which includes adjustments for capitalized interest), based on the current level of revenues from the U.S. government. We expect capital expenditures of approximately $260 million in 2012 to be partially offset by the $111 million of cost sharing from the NGA which GeoEye expects to receive by the end of July 2012. Outlook The developing outlook indicates there is a one-third or greater possibility of a downgrade and a one-third or greater possibility of an upgrade over the next year, pending further clarity around the NGA's funding decisions for GeoEye's services. We could lower the rating if the NGA decided not to exercise the additional nine-month option for the next contract year and all SLA revenues ceased in December 2012. We could also lower the rating if the likelihood of GeoEye losing all or most of its government business became more likely. Conversely, we could raise the rating if the company were to receive greater clarity about future funding for the SLA program and once GeoEye-2 became fully operational. However, we believe an upgrade would be limited to one notch given the likelihood of ongoing funding risks. The ability to diversify with other customers would be a positive factor, but given long lead times for new business wins, this is likely to be a positive rating factor on its own in the next year. 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Corporate Credit Rating B-/Developing/-- B+/Negative/-- Downgraded; Recovery Ratings Unchanged To From GeoEye Inc. Senior Secured 2nd-lien CCC B- Recovery Rating 6 6 Senior Secured 9.625% nts B BB- Recovery Rating 2 2 Ratings Withdrawn ORBIMAGE Inc. Corporate Credit Rating NR B+/Negative/-- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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