TEXT - S&P rates DigitalGlobe new debt issuance
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
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