Tue 11/02/2021 13:36 PM
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Relevant Documents:
Merger Prospectus
Q2 2021 6-K
Q1 2021 6-K
Q4 2020 12-F

Recent Situation Overview

Telesat Canada, a global satellite operator, has secured or is securing a total of $5 billion in financing investment to launch its Telesat Lightspeed constellation satellite network. As of Aug. 12, the company reported that it had 4 billion Canadian dollars ($3.226 billion, using a spot rate of 1.2398 CAD/USD) of “financing arrangements” in place from various sources, which include a contribution from Telesat for CAD 1.7 billion of cash to the Lightspeed constellation project (which partially includes investments made to date).

Telesat notes in its 20-F that it plans to develop, fund, construct and operate the Lightspeed constellation project in one or more of its unrestricted subsidiaries. Any debt incurred in relation to the Lightspeed constellation project at the unrestricted subsidiary level would likely rank senior to Telesat’s existing debt in relation to the assets related to the Lightspeed constellation project. On the basis of Reorg’s calculations, if the company proceeds with the Lightspeed constellation network, the unrestricted subsidiary would add approximately $2.25 billion of debt to its capital structure and issue $685.6 million of preferred equity through its current financing agreement with various external sources.

The company notes in its 20-F that it believes the Telesat Lightspeed constellation satellite network will “revolutionize” global broadband connectivity and “dramatically” increase the total addressable market, or TAM, from approximately $18 billion to $365 billion in 2023. The company said that through the project it expects to expand sales and its presence in Europe, Africa and Asia, where it does not have a “significant” presence, and aims to vertically target the terrestrial, aviation, maritime and government markets.

As Telesat continues to secure the remaining funding for the Lightspeed constellation project, the company disclosed in its 20-F that its business and operations were adversely affected by the Covid-19 pandemic during fiscal year 2020, in which the company reported revenue of CAD 820.5 million, down 9.9% year over year from CAD 910.9 million.

Telesat’s revenue segments are split between broadcast, enterprise, and consulting and other. The enterprise segment, which consists of maritime customers (cruise ships, yachts, oil and gas sites, and merchant vessels) and aviation customers (commercial and business aircraft), experienced the largest year-over-year decline in revenue, down 12.4% to CAD 389.7 million in fiscal year 2020 from CAD 444.7 million in FY 2019. Many of these customers were forced to shut down or sharply decrease their operations during calendar year 2020 because of the pandemic.

As of the end of the second quarter of 2021, the company reported CAD 1.466 billion of cash and $200 million USD of availability under its revolving credit facility. On the basis of Reorg’s calculations, of the CAD 1.7 billion cash contribution from Telesat for the Lightspeed constellation project, approximately CAD 653.1 million will be contributed from the unrestricted subsidiaries, CAD 619.9 million from the issuance of the 5.625% senior secured notes and CAD 427 million from the repurposing of the C-band spectrum.

As of the end of the second quarter, of the CAD 1.7 billion of cash contribution, the company has earmarked CAD 619.9 million from the 5.625% senior secured notes offering in April and CAD 427 million from the repurposing of the C-band spectrum. This would leave CAD 653 million of cash contribution from Telesat Canada, much of which might have already been contributed to unrestricted entities.

Lightspeed Constellation Project Overview

The company’s CAD 4 billion of “financing arrangements” for the Lightspeed constellation project is itemized as follows:
 
  • CAD 200 million unsecured loan from the government of Quebec;
     
  • CAD 200 million preferred equity to the government of Quebec;
     
  • CAD 790 million unsecured loan from the government of Canada;
     
  • CAD 650 million preferred equity to the government of Canada;
     
  • CAD 109 million from a five-year partnership with the government of Ontario;
     
  • CAD 1.7 billion of cash contribution from Telesat; and
     
  • CAD 351 million of undisclosed financing.

In addition, as consideration for its investment in the new project, Telesat Canada would issue CAD 144 million of warrants to the government of Canada.

The total sources and uses for the entire $5 billion (equivalent to CAD 6.2 billion) needed to finance the Lightspeed constellation project are shown below, on the basis of Reorg’s analysis, assuming an exchange rate of $1.2398 CAD/USD:
 

After consideration of the CAD 4 billion of financing secured by the company, Telesat would still need to raise CAD 2.199 billion of financing, which Telesat reports is expected to come “primarily from debt financing from certain export credit agencies, with whom Telesat is in advanced discussions.” According to SpaceIntelReport.com, the French export credit agency, Bpi France, and the Canadian export credit agency, Export Development Canada, or EDC, will provide CAD 1.8 billion in planned Lightspeed constellation network financing. The EDC did not respond to Reorg’s requests for comment.

The term sheet for the unsecured loans and preferred equity investment from the government of Canada also contemplates future financing from the EDC and Bpi France. According to the term sheet, the unsecured loans from the government of Canada and Quebec are pari passu with one another but subordinated in terms of “ranking and priority” to “Senior Loans.” Senior loans are defined as loans provided by Export Development Canada, the financial institutions insured by Bpifrance Assurance Export, and each other lender party to the loan documentation relating to the project financing of the Project LEO as more fully described in “Structure Element Paper for the Proposed Financing of the Telesat Lightspeed LEO Project.”

In addition, the 20-F notes that the company intends to fund, construct and operate its Telesat Lightspeed constellation in one or more of its unrestricted subsidiaries. According to the disclosure, “If the Telesat Lightspeed program proceeds, these unrestricted subsidiaries are expected to incur substantial additional debt, which would be secured by substantially all of the assets related to our Telesat Lightspeed constellation.”

The company also states, “We are developing, and intend to fund, construct and operate, our planned Telesat Lightspeed constellation, in one or more of our unrestricted subsidiaries. If the Telesat Lightspeed program proceeds, these unrestricted subsidiaries are expected to incur substantial additional debt, which would be secured by substantially all of the assets related to our Telesat Lightspeed constellation.”

Merger With Loral Space & Communications

On Nov. 24, 2020, Telesat Canada announced that it had entered into a merger agreement with Loral Space & Communications pursuant to which Telesat Canada and Loral would become subsidiaries of Telesat Corp., a new publicly traded Canadian incorporated and controlled company. According to the release, the merger transaction is expected to close by the end of the second or third quarter of 2021.

A press release states that as part of the merger agreement, “Loral and Telesat will also make certain cash payments to PSP Investments in connection with the transaction, including a payment of $7 million and a payment to adjust for the value of Loral's non-Telesat assets and liabilities at the time of the closing of the transaction.”

The company’s merger announcement to become a publicly traded company could help it raise the capital it needs for current and future operating needs as well as to fund the Telesat Lightspeed constellation network. The company’s merger press release notes that “[t]his transaction allows public market investors, including Loral’s stockholders, to own Telesat directly, and, moreover, provides Telesat access to the public equity markets to support its compelling growth initiatives, including its revolutionary, highly advanced low Earth orbit (LEO) satellite constellation.”

In addition to the CAD 2.199 billion financial funding, which included the reported CAD 1.8 billion investment by Bpi France and Export Development Canada, needed for the Lightspeed constellation network, the company discloses in the 20-F that additional capital is required to build an ecosystem to support the constellation network, which includes terminals and related installations that do not currently exist. The risk section in the 20-F notes that if Telesat is unable to raise sufficient capital, the company could decide to forgo the Lightspeed constellation network project, which “could have a material adverse effect on our results of operations, business prospects and financial condition.”

Even if the Telesat Lightspeed constellation network is launched, the company would face competition from larger companies and countries that have greater access to capital and might be at a more advanced stage of development, such as OneWeb, SpaceX, SES/O3b, Amazon and country-sponsored projects in China and Russia. These competitors also have greater access to launch capabilities, notably OneWeb, who has already launched dozens of satellites into their constellation, and SpaceX, who has launched over 1,000 satellites.

The 20-F notes that some of these competitors are already providing beta service on their LEO constellations and that Telesat believes it will not be the first LEO constellation to hit the market. If competitors are able to establish operational constellations before Telesat, the company could find it difficult to attract customers. Telesat also notes, “If successfully implemented, our Telesat Lightspeed constellation may decrease demand for our other satellite services ... Beyond the risk that our Telesat Lightspeed constellation decreases demand for our existing services, we face competition in the GEO and MEO segments, and our failure to compete in these markets could result in a material adverse effect on our operations, business prospects and financial condition.”

According to the merger prospectus, the newly formed Telesat Corp. will be the general partner of Telesat Partnership. Loral and Telesat Canada will be subsidiaries under Telesat Partnership. Telesat LEO, the unrestricted subsidiary in which the company said it expects to contribute assets related to the Telesat Lightspeed constellation network, is not shown in the organizational chart below and will continue to sit under the Telesat box in the organizational chart. The merger prospectus provides the following post-transaction organizational structure:
 

Capital Structure

The company’s capital structure, pro forma for the financing at the Telesat LEO unrestricted subsidiary, is shown below. The Telesat LEO unrestricted subsidiary would have $2.25 billion of debt on its capital structure and would issue $685.6 million of preferred equity, based on third-party announced and proposed funding. However, as noted above, CAD 1.7 billion ($1.372 billion) of new financing would also come from a contribution by Telesat Canada, some of which has already been invested. It is unclear if that would be a direct investment or set up as an intercompany loan.

Reorg calculates pre-project sources of cash of $3.852 billion at the unrestricted subsidiary including from the following external sources:
 
  • CAD 1.8 billion loans from the Export Development Canada and Bpi France;
     
  • CAD 200 million unsecured loan from the government of Quebec;
     
  • CAD 200 million preferred equity to the government of Quebec;
     
  • CAD 790 million unsecured loan from the government of Canada;
     
  • CAD 650 million preferred equity to the government of Canada; and
     
  • CAD 109 million cash from the five-year partnership with the government of Ontario.

According to the term sheet, the unsecured loans from the government of Canada and Quebec are pari passu with one another, but subordinated in terms of “ranking and priority” to the CAD 1.8 billion loans from the two export credit agencies and senior in terms of “ranking and priority” to the preferred equity that will be issued to the governments of Canada and Quebec. In addition, on Aug. 6, Telesat entered an agreement with the government of Ontario that will provide CAD 109 million in return for a five-year partnership.

Additionally, as noted above, CAD 1.7 billion of the funding needs for the Lightspeed project would come from a contribution from Telesat Canada, inclusive of investments made to date, cash on hand and proceeds expected from the U.S. C-band clearing process. The company is expected to receive approximately $344.4 million of cash from the repurposing of C-band spectrum.

In addition, Telesat in April sold $500 million (CAD 619.9 million) of senior secured notes, which the company said would be used to fund “additional investment into one or more unrestricted subsidiaries for the development of Telesat Lightspeed, Telesat's Low Earth Orbit (LEO) satellite network, for the payment of fees and expenses related to the Offering, and if the funding needs of Telesat Lightspeed are less than currently anticipated, for general corporate purposes.”

This would leave CAD 653 million of the anticipated CAD 1.7 billion investment from Telesat Canada remaining. On June 30, Telesat reported CAD 566.5 million of cash held at unrestricted subsidiaries. It is possible that a significant amount of that cash was contributed by Telesat Canada for the Lightspeed project. The company said that on Dec. 31, 2020, Telesat contributed $193 million (CAD 239.3 million) in cash to Telesat LEO Holdings Inc. Cash held at restricted entities on June 30 totaled CAD 899.6 million. However, that cash includes net proceeds from the $500 million offering in April.

Relative to the rest of Telesat’s capital structure, debt and preferred equity at the unrestricted subsidiary would be senior in right to the assets at Telesat LEO. However, it does not appear that other parent entities of Telesat LEO would guarantee the newly issued debt, so the unrestricted securities would not have a claim against other Telesat assets. Alternatively, since the rest of Telesat’s debt is issued out of the parent company, that debt would have a claim on any residual value of the Telesat LEO project.
 
(Click HERE to enlarge.)

As of the end of the second quarter, Telesat Canada had $3.003 billion of total debt on its capital structure at the parent company, consisting of $2.453 billion of secured debt and $550 million of unsecured debt.
 
  • The company’s senior secured credit facilities, which include an undrawn revolver and $1.553 billion drawn on its U.S. term loan B, are secured by a first-priority security interest in the assets of Telesat and certain of its subsidiary guarantors. According to the second-quarter 6-K, the credit agreement requires Telesat and the guarantors to comply with a maximum first lien leverage ratio and includes an excess cash sweep that may require the company to repay a portion of the outstanding principal under its senior secured credit facilities prior to the stated maturity.
  • Telesat has $500 million of 5.625% senior secured notes due 2026 and $400 million of 4.875% senior secured notes due 2027, which are secured by first-priority liens on the collateral that secures the existing credit agreement.
     
    • The company’s $500 million 5.625% senior secured notes due 2026 were issued on April 27. According to the release, the proceeds from the offering would fund additional investment into one or more unrestricted subsidiaries for the development of the Lightspeed constellation project, for the payment of fees and expenses related to the offering, and for general corporate purposes if the funding needs of Telesat Lightspeed are less than currently anticipated.
  • Telesat has $550 million of 6.5% senior unsecured notes due 2027 with the same restrictive covenants as the senior secured notes.

The total debt leverage ratio as of June 30 was 6.1x, assuming LTM adjusted EBITDA of $489.8 million.

On Jan. 7, the 4.875% senior secured notes due 2027 traded at 102.974, and on Jan. 4, the 6.5% senior unsecured notes due 2027 traded at 104.25. On Aug.12, after the announcement of having CAD 4 billion of “financing arrangements” in place from various sources, the 5.625% senior secured notes due 2026 traded at 97.75, the 4.875% senior secured notes due 2027 traded at 95 and the 6.5% senior unsecured notes traded due 2027 at 90.25. As of Nov. 1, the 5.625% senior secured notes due 2026 traded at 93.72, the 4.875% senior secured notes due 2027 traded at 89.397 and the 6.5% senior unsecured notes due 2027 traded at 81.25, according to TRACE.

Business Overview

Telesat Canada is a global satellite operator that has provided customers with communications services since the 1960s. The company competes in the market for the provision of voice, data, video and internet connectivity services worldwide. Services of this type are provided using various technologies, including satellite networks. Telesat Canada provides communications links between fixed points on the earth’s surface, or point-to-point services, and from one point to multiple points, or point-to-multipoint services. The company has been increasingly able to provide services to mobile platforms, such as ships and airplanes.

According to the 20-F, due to deregulation and privatization over the past several decades, the satellite sector has been “significantly” reshaped. In addition, the sector has undergone consolidation, with regional and national operators being acquired by larger companies or seeking to partner with other providers. There have also been many new, smaller entrants, including many governmental operators, launching national or regional satellite programs.

The company reports revenue from three customer bases in which it provides satellite-based services: broadcast, enterprise, and consulting and other. Broadcast includes direct-to-home television, video distribution and contribution, and occasional use services. Enterprise includes telecommunication carrier and integrator, government, consumer broadband, resource, maritime and aeronautical, retail, and satellite operator services. Consulting and other includes consulting services related to space and earth segments, government studies, satellite control services, and research and development. During fiscal year 2020, approximately 50.1% of revenue was derived from its broadcast customers, 47.5% from its enterprise customers and 2.4% from its consulting and other customers.

Geographic regions of operations include Canada, the United States, EMEA, LatAm and the Caribbean, and Asia and Australia, with approximately 81.7% of the 2020 revenue derived from Canada and the United States. As of the second quarter ended June 30, Telesat provides satellite services to customers from its fleet of 16 geostationary orbit, or GEO, satellites.

The company is developing its Telesat Lightspeed constellation network, which consists of a fleet of 298 interconnected LEO satellites. The company discloses in its 20-F that as of Dec. 31 it expects to begin launching the first Telesat Lightspeed satellites within two years and commencing commercial services in the second half of 2023. In its merger prospectus, the company notes, “Telesat Lightspeed was designed to optimally serve the key market verticals on which we are focused. It will allow Telesat to provide highly compelling and cost-effective broadband services that will allow Telesat customers, serving both traditional and new satellite markets, to improve their competitiveness and expand their businesses.”

On Feb. 9, Telesat announced it entered into an agreement with Thales Alenia Space, or TAS, to be the prime manufacturer of the Telesat Lightspeed constellation satellites. On Feb. 18, Telesat announced that it selected MDA Montreal to manufacture the phased array antennas that are to be incorporated into the Lightspeed constellation satellites. Under the terms of both agreements, the parties provided for the continued advancement of the programs while Telesat continues to seek financing for the projects. As previously discussed, as of Aug. 12, the company reported it had “financing arrangements” of CAD 4 billion to fund the Telesat Lightspeed program.

Summary Financials
 
(Click HERE to enlarge.)

Telesat Canada has experienced a decline in revenue and EBITDA beginning in the fourth quarter of 2019, primarily due to the effects of the Covid-19 pandemic, which led to its customers either shutting down or decreasing their operations. According to the 20-F, as a result, Telesat Canada said that “our customers in the maritime and aeronautical markets have been significantly impacted by the COVID-19 pandemic and measures implemented in response to it. At the request of some of these customers, we have agreed to amend the terms of certain of their contracts to mitigate the adverse financial impact COVID-19 is having on their respective businesses ... In addition, certain of our maritime and aeronautical customers commenced voluntary bankruptcy proceedings.”

The company also disclosed in the 6-K that it had approximately CAD 2.4 billion of contracted revenue backlog as of the end of the second quarter.

The company reported revenue of CAD 820.5 million in fiscal year 2020, down 9.9% from CAD 910.9 million in fiscal year 2019. On a customer-service level, the enterprise services segment had the largest decrease in revenue, of 12.4%, from the prior year. Revenue from broadcast services decreased 7.4% to CAD 411.1 million in fiscal year 2020 from CAD 444.5 million in fiscal year 2019. In fiscal year 2020, Telesat Canada reported adjusted EBITDA of CAD 653.4 million, down 14.3% from CAD 762.7 million in 2019.

During the second quarter, the company reported revenue of CAD 87.9 million, down 9.6% from CAD 207.8 million in the prior-year period. The company reported second-quarter adjusted EBITDA of CAD 148.8 million, down 9.5% from CAD 164.3 million in the prior-year period.

During the second quarter, Telesat Canada generated CAD 54.3 million of cash flow from operating activities and spent CAD 70.8 million on capital expenditures, which Reorg defines as satellite program and PP&E expenses. During the second quarter of 2020, the company generated CAD 38.7 million from operating activities and spent CAD 8.5 million on capital expenditures.

The company ended the second quarter of 2021 with CAD 1.466 billion of cash and cash equivalents, compared with CAD 883.1 million of cash and cash equivalents in the first quarter of 2021. The increase of cash was primarily due to the issuance of $500 million of aggregate principal amount of the 5.625% senior unsecured notes due 2026 on April 27. Of the company’s CAD 1.466 billion, or $1.183 billion, of cash, $725.6 million resided at the restricted subsidiaries and $456.9 million resided at the unrestricted subsidiaries, which include Telesat LEO.

Conclusion

Although the company has generated free cash flow in excess of CAD 275 million in each of the past three fiscal years, operational challenges and substantial capital needs to fund the Lightspeed constellation network project could put a potential strain on its liquidity position or force it to continue accessing capital markets. With seven consecutive quarters of declining revenue, the pledge of CAD 1.7 billion cash contribution to the Lightspeed constellation network project, and the company looking for additional financing for the project, the company will likely be reliant on capital markets to fund the project and to fund other ongoing capital expenditures.

The company’s merger announcement to become a publicly traded company could be another avenue to help raise capital for the Lightspeed constellation network and for normal operations, as it would allow public market investors to own Telesat directly and provide Telesat with access to the public equity markets to support its growth initiatives, including its LEO satellite constellation.

As noted earlier, the company also requires additional capital to build an ecosystem to support the constellation network, which does not currently exist. If Telesat is unable to obtain the remaining financing needs for the project, it could fail to expand its geographical presence and customer footprint.

Even if the company successfully launches the constellation network, Telesat notes that it could face additional pressures from competitors that have access to more capital, have already launched their constellation network and are already in beta service.

--Wing Li
 
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