The outlook revision reflects our view that operating performance will remain
stable in 2012-2013 ahead of the launch of four new satellites that are likely
to support long-term growth. We think free operating cash flow (FOCF) will
gradually improve after being negative in 2012. Moreover, in our opinion,
adjusted gross debt to EBITDA will remain below 3.5x and adjusted funds from
operations (FFO) to gross debt above 20% in the next two years. The ratings on
Inmarsat reflect our assessment of the group's "significant" financial risk
profile and its "satisfactory" business risk profile.
We expect revenues to be flat in 2012-2013, excluding revenues stemming from
the LightSquared agreement, which has been suspended until March 2014, and to
gradually increase in 2014-2015 into a mid-single-digit annual percentage
rate--assuming the new satellites are launched according to plan. This is
supported by continued positive developments in the marine segment in the
first half of 2012, offsetting the decline in the land segment, and further
growth opportunities after the launch of future Ka-band services. We also
expect the adjusted EBITDA margin, excluding LightSquared, to remain stable
compared with 2011, at about 56%.
We expect FOCF to be about negative $80 million in 2012 and slightly negative
in 2013 because of the large satellite-related investments in a relatively
short period. Capital spending should be about $1.2 billion for the Inmarsat-5
program (three Ka-band satellites to be launched between the third quarter of
2013 and the fourth quarter of 2014) and $370 million for the Alphasat program
(one L-band satellite to be launched in the second half of 2013), most of
which was or will be spent in 2011-2013. We see FOCF returning to positive in
2014, when the new satellites should start generating cash flows and capital
spending should fall significantly.
We still perceive Inmarsat's financial policy as "aggressive" after an annual
dividend increase of 10% in 2011 and in 2012 and the announcement of a $250
million share buy-back program, which took place when the group was spending
large amounts of capital.
However, we now think it likely that shareholder remuneration in 2013 and 2014
will increase only modestly, assuming a smaller annual dividend increase than
in previous years and a postponement of the remaining $142 million to be spent
under the current share buy-back program. This assumption is based on our
understanding that the share buy-back program was linked to the LightSquared
agreement, now suspended, and management's public guidance of net leverage
peaking at about 3x in 2013.
Under our base-case assessment, we anticipate that adjusted gross debt to
EBITDA will rise to 3.3x in 2013 from 3.0x in 2012, and adjusted FFO to gross
debt will weaken to 23% in 2013 from 28% in 2012. As we expect credit metrics
to improve in 2014, we no longer think they could deteriorate beyond our
indicative targets of 3.5x and 20%, respectively, which we deem adequate for
We assess Inmarsat's liquidity as "adequate" under our criteria. This reflects
our view that the group's sources of liquidity will cover its uses by more
than 1.2x for the 12 months to Dec. 31, 2012. As of June 30, 2012, we estimate
that Inmarsat's liquidity sources over the subsequent 12 months will be about
$1.5 billion. These include:
-- Cash and liquid investments of $377 million;
-- Our forecast of FFO of about $500 million; and
-- About $700 million available under a committed $750 million senior
credit facility due June 2016 and the $700 million Export-Import Bank of the
United States facility due 2023, which may be drawn down until May 2014 to
fund the group's Ka-band satellite investments. The credit facilities are
subject to financial covenants, under which we anticipate that Inmarsat will
maintain adequate headroom.
We estimate Inmarsat's liquidity needs over the same period to be about $900
-- Forecast capital expenditures of up to $650 million;
-- Dividends of $188 million in 2012 and potentially more in 2013; $10
million spent each year in share repurchases in 2012 and 2013; and
-- Small annual debt amortization requirements of $38 million.
We understand that no holder of the convertible bond issued by the top holding
Inmarsat PLC has opted for early redemption in October 2012. We have
consequently removed the associated financial liabilities from our 12-month
liquidity needs assumptions because the next put option is in October 2014.
The issue rating on Inmarsat Investments Ltd.'s $750 million revolving credit
facility (RCF) is 'BBB' The recovery rating on this senior secured facility is
'1', indicating our expectation of very high (90%-100%) recovery prospects in
the event of a payment default.
The $850 million senior unsecured notes issued by Inmarsat PLC's indirect
subsidiary Inmarsat Finance are rated 'BB+', in line with the corporate credit
rating on Inmarsat. The recovery rating on this debt is '4', indicating our
expectation of average (30%-50%) recovery for creditors in the event of a
In order to determine recoveries, we simulate a hypothetical default scenario.
Under this scenario, we assume a decline in demand for the group's existing
services and a limited take-up of new services, thereby increasing price
pressure and eroding revenues. These conditions could be compounded by
potential satellite failures. Our analysis assumes that Inmarsat would most
likely default from an inability to refinance its senior secured credit
facility in 2016. We could envisage a later default, for example, when the
senior notes mature. However, we would anticipate that the capital structure
would be broadly the same at a later point of default as we would expect the
company to have future financing needs to fund additional replacement
satellites for the Inmarsat 4s.
We value Inmarsat on a going-concern basis, given the nature of the assets and
high barriers to entry in the satellite communications industry. However, we
believe that recovery values are likely to be intrinsically linked to the
value of the satellites. We have therefore used a discrete-asset valuation to
estimate the value available to creditors.
We value Inmarsat's assets at about $1.9 billion at our hypothetical point of
default in 2016, allowing for a haircut to asset values. Our valuation takes
into account the group's current asset base, its $370 million investment in
the new AlphaSat satellite to be launched in 2013, and the $1.2 billion
investment program for the construction and launch of the three Ka-band
satellites in 2013-2014. While we do not assign a specific value to the
spectrum licensed to Inmarsat, we believe that it could be sold in the event
of a default, particularly in the U.S., and would support current recovery
prospects for debtholders. That said, in our opinion, recovery prospects for
the unsecured noteholders remain very sensitive to increases in the amount of
pari passu or priority debt, which could result in us lowering our issue and
recovery ratings on the senior unsecured notes.
From our valuation of $1.9 billion, we deduct priority liabilities of about
$120 million, primarily comprising enforcement costs and 50% of pension
liabilities. We then deduct about $1.43 billion of senior secured debt
outstanding at default, which includes six months of prepetition interest, and
assumes a fully drawn RCF at default. However, we do not assume that the $150
million uncommitted accordion facility is utilized. This leaves about $350
million for the senior unsecured noteholders from our estimate of about $880
million outstanding at default (including six months' prepetition interest).
The stable outlook reflects our view that Inmarsat's FOCF will improve
gradually after bottoming out in 2012, and that adjusted gross debt to EBITDA
will remain below 3.5x and adjusted FFO to gross debt over 20%.
We could downgrade Inmarsat if we were to foresee the group's generating
significantly negative FOCF over a prolonged period, which, if combined with
shareholder returns above the level we have assumed, would result in credit
measures below our expectations for the current ratings.
We view the possibility of an upgrade as remote, given expectations for
negative discretionary cash flow over the next two years.
RELATED CRITERIA AND RESEARCH
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings On Global Industrials
Issuers' Speculative-Grade Debt, Aug. 10, 2009
-- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
CreditWatch/Outlook Action; Ratings Affirmed
Inmarsat Holdings Ltd.
Inmarsat Investments Ltd.
Inmarsat Ventures Ltd.
Corporate credit rating BB+/Stable/-- BB+/Negative/--
Inmarsat Finance PLC
Senior Unsecured(1) BB+ BB+
Recovery Rating 4 4
Inmarsat Investments Ltd.
Senior Unsecured(2) BBB BBB
Recovery Rating 1 1
(1)Guaranteed by Inmarsat Investments Ltd.
(2)Guaranteed by Inmarsat S.A., Inmarsat Global Ltd., and Inmarsat Ventures