Fearing fratricide in the sky, Wall Street is losing its ardor for backing risky telecommunications ventures with junk bonds. In recent weeks, mobile satellite service developers Iridium Inc. and Globalstar L.P. have had to scrap high-yield, high-risk debt offerings after meeting resistance from the investment community.
Standard & Poor’s Ratings Group assigned a scathing “CCC+” rating to Iridium’s $300 million senior subordinated discount notes due 2005 offering in August.
Iridium-backed by Motorola Inc.-sought the bond financing to fund the development, construction and deployment of 66 low-earth-orbit satellites and related gateway equipment.
The venture already had raised $1.6 billion from its global equity investors but Standard & Poor’s said Iridium would need to continue to rely on external sources to obtain another $2.6 billion to complete the system.
“The company’s rating reflects the high degree of business risk associated with a start-up operation and the need to obtain significant additional financing to complete the Iridium satellite system. Until 1999, the company will not be able to internally fund any of its capital requirements because cash flow is expected to be negative during this period,” Standard & Poor’s said.
The firm also noted, “The integration of a number of sophisticated technologies that have not been previously accomplished commercially and the location in space of a significant portion of the system’s hardware heightens the company’s business risk.”
Iridium reportedly has decided to withdraw the bond offering in favor of seeking more internal financing from its equity backers.
Globalstar fared a little better with its bond offering, receiving a “B+” rating for its $400 million senior secured discount notes series A due 2005.
The venture-backed by Loral Corp. and Qualcomm Inc.-wants to build a 48-satellite LEO system at a cost of nearly $2 billion.
Although Globalstar shares the same start-up risks as Iridium, Standard & Poor’s said, “this is tempered somewhat by the completion guarantee provided from the “BBB” rated Loral Corp….and minimum service payment commitments from strategic customers to retain exclusive rights to the Globalstar system.”
Under the completion guarantee, Loral would be required to make a capital contribution of nearly $250 million to help pay off the debt if the system was not operating by June 30, 2000.
But after jumping through all the hoops to improve its bond rating, Globalstar decided to withdraw the offer in favor of a $250 million bank financing led by Chemical Bank.
“The bank facility will be drawn down as needed and will extend Globalstar’s financing options and flexibility into the second half of 1996,” the company said. The loan will be guaranteed by its strategic partners, led by Loral.
The cold shoulder these offerings have received is in marked contrast to the way both the cable television and cellular telephone industries were fueled by junk bonds in the 1980s.
But mobile satellite service carriers face a much tougher competitive environment than did cable and cellular operators who were protected by monopoly and duopoly market structures, respectively.
In rating the two companies’ bond offerings, Standard & Poor’s noted that competition from other LEO satellite systems posed additional challenges to Iridium and Globalstar.
Washington, D.C.-based consulting firm Economic and Management Consultants International Inc. recently noted that given the high cost of launching a MSS system, the relatively limited market demand and the high degree of competition, some MSS competitors might not make it.
Evidently Wall Street thinks so too.