By Aaron Weinman
NEW YORK, Sept 24 (LPC) - UK telecommunications and
satellite operator Inmarsat on Monday revised its US$1.75bn
leveraged loan as investors, wary of a cooling economy, raised
concerns about the company's leverage, limited cash flow and
increased competition in the telecommunications and satellite
operations industry, sources familiar with the transaction told
Refinitiv LPC.
Inmarsat, which will use the term loan B to support its
purchase by a consortium of investors led by Apax Partners,
decreased the size of the term loan B by US$700m from US$2.7bn
and increased its concurrent bond to US$1.825bn from US$1.125bn
on September 20. Inmarsat on Monday again cut the size of the
loan by US$250m and upsized the bond to make up the difference.
“There is a lot of capex required and high leverage. So
there is little room for error (for Inmarsat),” said one
portfolio manager that looked at the transaction.
To attract investors, Inmarsat also increased the interest
rate on the loan. The company will pay lenders at a rate of
450bp over Libor compared to the proposed range of 400bp-425bp.
The original issue discount was revised to 98 cents on the
dollar versus a prior discount of 99 cents and a 1% Libor floor
was embedded into the transaction, banking sources said.
Barclays, Bank of America Merrill Lynch and UBS arranged the
deal.
Two years of high capital expenditures led to modest cash
flow numbers in 2018 and 2017. Inmarsat logged US$10.5m in free
cash flow at the end of 2018 and US$41.2m for the end of 2017,
according to the company's financials.
Though the satellite operator recorded US$170.7m in cash
flow for the first half of 2019, cash flow is expected to be
limited over the next two years due to high capex requirements,
according to an offering memorandum for Inmarsat's bond sale
obtained by Refinitiv LPC.
Heightened competition in the global communications industry
will also require greater investment from the company as it
looks to keep up with its rivals.
Companies in the fixed-satellite services sector are
attempting to gain market share through lower costs, while
others such as US-based Iridium Communications have invested
heavily in new equipment and technology.
In the mobile-satellite service sector, Inmarsat is under
regional pressure from peers such as Globalstar and Thuraya
Telecommunications that have both added more satellites in
orbit, according to sources.
Apax, along with Warburg Pincus, the Canada Pension Plan
Investment Board and the Ontario Teachers’ Pension Plan in March
made a cash offer of US$7.09 for each Inmarsat share, valuing
the purchase at about US$3.4bn.
Inmarsat, rated BB by S&P Global Ratings, had its loan rated
B+ on September 10 by the ratings agency. The loan’s rating is
hamstrung by a capital structure that is roughly 6.0 times
levered on an adjusted debt-to-Ebitda basis. This level should
dip, however, to around 5.5 times in 2020 and between 5.1-5.3
times in 2021, S&P said in its report.
Inmarsat declined to comment.
RECESSION FEARS
As global recession fears have mounted over the last three
months, US-based investors started demanding greater returns for
leveraged loans. They favor deals for higher-rated companies
better-placed to weather the potential slowdown in global growth
over riskier borrowers languishing in the low single B-rated
territory that carry a larger default risk in the event of a
downturn.
In August, at least five single-B rated borrowers withdrew
transactions from the syndicated loan market amid low demand,
while Inmarsat is one of at least four companies to revise their
deals in the last week.
Digital imaging company Shutterfly, which is raising debt to
back its acquisition by Apollo Global Management, reduced its
loan to US$1bn from US$1.285bn, increased the margin to 550bp
over Libor from 525bp, amended the discount to 97 cents on the
dollar from a range of 98-99 and implemented a series of
lender-friendly changes to the loan documentation.
Automotive artificial intelligence firm Cerence revised a
US$425m loan to support its spinoff from conversational AI
platform developer Nuance Communications.
The company on September 20 sweetened the spread to a range
of 425bp-450bp over Libor after initially guiding it at 375bp,
while the discount was amended to 99 from 99-99.5 cents on the
dollar.
And auction house Sotheby’s on Monday widened the margin to
550bp over Libor from a range of 450bp-475bp for a US$500m loan
backing its acquisition by French media and telecom entrepreneur
Patrick Drahi.
“Leverage and add-backs paint a dangerous script. The fact
there’s pushback on certain transactions means there is some
recognition of risk,” said Tim Gramatovich, chief investment
officer at Gateway Credit Partners.
(Reporting by Aaron Weinman. Editing by Michelle Sierra and
Leela Parker Deo.)
