TEXT - S&P rates DigitalGlobe new debt issuance

Tue Jan 15, 2013 10:47am EST

Overview
     -- Commercial satellite imagery provider DigitalGlobe Inc.     
plans to finance its announced combination with GeoEye Inc. and repay existing 
indebtedness at both companies with an aggregate of $700 million in new senior 
secured credit facilities and $500 million in new senior unsecured notes.
     -- We are assigning our 'BBB-' and '1' recovery ratings to the company's 
proposed $700 million senior secured credit facilities, which consist of a 
$550 million senior secured term loan due 2020 and $150 million revolving 
credit facility due 2018.
     -- We are assigning our 'BB' and '4' recovery ratings to the company's 
proposed $500 million in senior unsecured notes due 2021.
     -- We are affirming our 'BB' corporate credit rating and negative outlook 
on DigitalGlobe.
     -- The negative outlook reflects the heightened leverage associated with 
the acquisition of GeoEye, and possible integration risks, which could keep 
leverage high through 2014 if expected cost savings from the merger are not 
fully realized.

Rating Action
On Jan. 15, 2013, Standard & Poor's Ratings Services assigned its 'BBB-' 
issue-level and '1' recovery ratings to DigitalGlobe Inc.'s proposed $700 
million senior secured credit facilities, which consist of a $550 million term 
loan due 2020 and $150 million revolving credit facility due 2018. The '1' 
recovery rating on this debt indicates our expectation for very high (90% to 
100%) recovery in the event of a payment default. At the same time, we 
assigned our 'BB' issue-level and '4' recovery ratings to the proposed $500 
million senior unsecured notes. The '4' recovery rating on this debt indicates 
our expectation for average (30% to 50%) recovery in the event of a payment 
default. DigitalGlobe will use the proceeds of the term loan and senior 
unsecured notes, along with cash, to finance its combination with GeoEye, 
repay existing indebtedness at both companies, and pay fees and expenses.

We also affirmed our 'BB' corporate credit rating and negative outlook on 
DigitalGlobe. 

Rationale
The ratings on Longmont, Colo.-based DigitalGlobe Inc. reflect Standard & 
Poor's Ratings Services' view of the company's "fair" business risk profile 
and "aggressive" financial risk profile. We believe DigitalGlobe will continue 
to benefit from revenues from its EnhancedView service-level agreement (SLA) 
with the National Geospatial-Intelligence Agency (NGA), an arm of the U.S. 
government. Given that the NGA did not renew the EnhancedView SLA with GeoEye, 
we believe it is less likely that the U.S. government will pursue further 
budget cuts that would affect DigitalGlobe's EnhancedView SLA over the next 
few years. Assuming the transaction with GeoEye closes, DigitalGlobe will be 
the sole provider of high-resolution commercial satellite imagery services for 
various agencies within the U.S. government. Given DigitalGlobe's strengthened 
market position following the merger with GeoEye, we believe it is well 
positioned to retain its full share of expected revenues from the EnhancedView 
SLA. At the same time, the ratings recognize that government contracts are not 
guaranteed until Congress appropriates the funds and that, though unlikely, 
government agencies may terminate or suspend their contracts at any time. Pro 
forma for the GeoEye transaction, about half of DigitalGlobe's revenue will 
come from customers within the U.S. government, and we factor this customer 
concentration into our business risk assessment.

In acquiring GeoEye, DigitalGlobe gains a stronger foothold in image 
processing and analytic services, which could help to propel ancillary revenue 
growth, particularly in the commercial and international segments. 
DigitalGlobe currently has a relatively weak presence in the advanced imagery 
processing and analytics segments, and the combination with GeoEye provides 
the company with a full suite of imagery services that it can provide to 
existing and potential customers. The acquisition of GeoEye is subject to 
various regulatory approvals, but our base-case scenario envisions the 
transaction being completed in early 2013.

The GeoEye acquisition provides DigitalGlobe with significant scale benefits 
in the form of operational cost synergies and reduced capital spending to 
manage a combined three-satellite constellation system on a long-term basis. 
We recognize the potential integration risks in realizing these synergies, 
which could keep leverage high through 2014 if expected savings do not 
materialize, and we incorporate this risk into our negative rating outlook.

DigitalGlobe's "aggressive" financial risk profile is based on our view that 
total debt to EBITDA, including our adjustment for operating leases, will rise 
above 4x in 2013 and funds from operations (FFO) to total debt will decline 
below 20% in 2013, due to the acquisition of GeoEye. In 2014, our ratings 
assume that credit metrics will improve to near pre-acquisition levels, with 
debt to EBITDA in the low-3x area, and FFO to total debt in the mid-20% area.

Our base-case scenario also includes the following specific assumptions:

     -- Organic revenue growth in the high-single-digit area for both 2013 and 
2014. We expect EBITDA to grow to around $250 million in 2013, mainly due to 
the acquisition, with EBITDA margins decreasing from the mid-40% area to the 
high-30% area, to account for the loss of GeoEye EnhancedView SLA revenues, 
and the high operating leverage inherent in the satellite imagery business.
     -- EBITDA of approximately $320 million in 2014 due to the expected 
realization of cost savings from the GeoEye acquisition, organic revenue 
growth, and a further increase in recognizable revenue related to 
DigitalGlobe's SLA.
     -- Free operating cash flow (FOCF) remains negative in 2013 as a result 
of capital expenditures required for the completion of the WorldView-3 and 
GeoEye-2 satellites. We expect the company to generate a moderate level of 
FOCF in 2014 as a result of EBITDA growth and lower capital spending 
requirements.

On Aug. 6, 2010, the NGA awarded DigitalGlobe a $3.55 billion award under its 
10-year EnhancedView commercial imagery contract. Under the service-level 
agreement (SLA) portion of this contact, the NGA is contractually committed to 
make $250 million of imagery purchases per year for the first four years and 
$300 million per year for the final six years. In exchange, DigitalGlobe must 
make a substantial portion of its satellites' image-taking capacities 
available to the NGA. The company expects commercial customers, other U.S. 
government agencies, and non-U.S. governmental entities to take up the 
remaining capacity.

DigitalGlobe's business plan greatly depends on its contract with the NGA, a 
U.S. government entity which purchases earth imagery content from commercial 
providers on behalf of other agencies within the U.S. government, including 
the Departments of Defense (DoD), State, and Homeland Security; the Central 
Intelligence Agency; and the Defense Intelligence Agency. Revenues from the 
NGA SLA constituted approximately 48% of DigitalGlobe's consolidated revenues 
in the third quarter of 2012.

DigitalGlobe currently operates three satellites: QuickBird, WorldView-1, and 
WorldView-2. In addition, it is building a new satellite, WorldView-3, which 
it expects would be ready for launch in 2014. DigitalGlobe is acquiring the 
GeoEye-1 and GeoEye-2 satellites, with the latter expected to be ready for 
launch in 2013. Historically, the on-orbit failure rate for the satellite 
industry is about 5%, while rocket launches fail about 10% of the time. 
Debtholders are provided some protection from satellite failure, as 
DigitalGlobe currently maintains insurance on all its satellites.

Liquidity
We view DigitalGlobe's liquidity as "adequate" under our criteria. Sources of 
liquidity are likely to be at least 1.5x uses over the next 12 months. 
Further, we believe that DigitalGlobe could experience an unanticipated EBITDA 
decline of at least 20% and maintain sources of liquidity adequate to cover 
uses. As of Sept. 30, 2012, sources included a cash balance of over $230 
million, and expected FFO of about $180 million during 2012. Uses of liquidity 
primarily consist of capital spending of about $235 million in 2013 for 
satellite construction and maintenance of existing infrastructure. We expect 
that the company will set financial maintenance covenants to provide at least 
30% cushion under the proposed transaction.

Recovery analysis
For the recovery analysis, see the recovery report on DigitalGlobe, to be 
published on RatingsDirect soon after this report.

Outlook
The outlook is negative, which reflects the expected heightened leverage 
associated with the acquisition of GeoEye, and possible integration risks, 
which could keep leverage elevated through 2014 if expected synergies do not 
materialize from the business combination. We could lower the rating if FFO to 
debt were to remain under 20% or if leverage were to remain above 4x on a 
sustained basis. If the company is able to realize meaningful operating 
synergies from its combination with GeoEye, we could revise the outlook to 
stable within the next year.

Given the significant customer concentration from the U.S. government at 
around 50% of the combined companies' revenues, it is unlikely that we would 
raise the rating unless revenues become more diversified, and FFO to debt rose 
above 35% on a sustained basis.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008



Temporary contact numbers: Michael Weinstein, CFA (347-344-8257); Catherine 
Cosentino (718-744-8383)

Ratings List

Ratings Affirmed; Recovery Rating Unchanged

DigitalGlobe Inc.
 Corporate Credit Rating                BB/Negative/--     

DigitalGlobe Inc.
 Senior Secured                         BB+                
   Recovery Rating                      2
New Rating

DigitalGlobe Inc.  
 Senior Secured
  US$550 mil  term B bank ln due 2020   BBB-               
   Recovery Rating                      1                  
  US$150 mil revolver bank ln due       BBB-               
  2018                            
   Recovery Rating                      1                  
 Senior Unsecured
  US$500 mil sr unsecd notes nts due    BB                 
  2021                            
   Recovery Rating                      4