We called Newsat right in October 2014 (although we were bombarded with shrieking email for doings so). It was clear that this was a business that had designed the wrong system with the wrong financing structure and resources. There will not be a big competition over the right to pick over bones of the Company and the outcome is probably already set in Measat’s favour. US EXIM will certainly lose a lot of credibility and maybe a bit of money, and equity investors are totally wiped out. Thus we expected.
But the latest stories of doom are at the other end of the scale. We did, also back in October, rather tongue in cheek, describe Intelsat as Zombies in space. Their crushing debt burden combined with a low growth business made it a challenging investment, despite having the stability benefit of scale. Since then the share price has fallen from $17 to $10. But it may get much worse. Hedge funds are actively circulating a short thesis now linked to Intelsat’s inability to compete in existing markets and the absence of any truly compelling growth story. Interest rates will be going up, and when Intelsat comes to re-finance the next tranche of its bonds, we would not expect the market to be very enthusiastic.
The Intelsat Luxembourg bonds (a part of a very complex and exotic bond structure that we struggle to understand) are now trading an 11% discount to par. If debt investors lose faith in the Company, then it would mean the equity would be worth nothing. With some $15bn of debt supported by only $1.1bn of equity that is perhaps not quite as crazy as it might once have seemed.