Description

See my previous writeup for an in-depth and still relevant overview of Telesat’s business and developments as a company (under Loral, LORL). The 2027 Senior Unsecured Notes trading at $42 make an interesting investment (15.5% current yield) as the company is buying back debt in the open market and the bonds will likely see somewhat of a pop when the company updates us on their ECA financing for their LEO constellelation in the next month or so.

Since the original writeup, Telesat and Loral closed their reverse merger and PSP’s former private stake in Telesat is now public through what was previously LORL and is now TSAT.

With inflation and the chip shortage, the cost of Telesat’s LEO constellation has increased. As such, they sized down the number of satellites to keep costs flat. See below from CEO Dan Goldberg’s discussion with Phil Cusick at the JPM conference which is what I’d be paraphrasing so better to just copy/paste.

So as you say, Phil, our plan was to start with 298 satellites and serve these verticals that I was talking about. What changed was supply chain issues and the inflation that sort of came with that. We're -- maybe I'll take a step back. The plan all along was to launch our satellites in kind of this hybrid orbital architecture that we've developed. There are 78 satellites in a polar orbit. Then we're going to add another 110 satellites in these more equatorial orbits and that was going to give us -- that will give us full global coverage. That was 188 satellites.  So what are we giving up? We're probably giving up I think the original plan with the 298 satellites, it was roughly like 15 terabits of global system capacity. We'll start now instead with 10 terabits. 

Funding of the LEO Constellation:

That's [export credit agencies] the big missing piece right now, and we've been as explicit about this as possible. We have lined up a little bit more than USD 3 billion -- no, I mean dollars, about USD 3 billion of financing between the cash that Telesat has on its balance sheet, the contributions that we've made to date. We've announced a -- now I'll move to Canadian dollars, sorry, about a CAD 1.4 billion financing commitment from the federal government of Canada, another CAD 400 million from the government of Quebec. We've got the C-band proceeds that we were talking about that we're going to contribute to our LEO constellation. So the missing piece, we've said that the total CapEx of our constellation is around USD 5 billion. So the missing piece has been completing our financing discussions with the export credit agencies that we're hoping will support the program. And so we're -- we have to pause our discussions with them when we had the supply chain hiccups with the vendor. We're now reengaged with the export credit agencies, but that's the focus right now is bringing those discussions to a successful close.

Despite giving guidance on flat capex costs for the LEO constellation, the stock and the bonds have declined in price. Our best (somewhat educated) guess is that since TSAT has not fully updated the market on the $2bln USD funding gap mentioned above, the market is afraid they will fund the LEO constellation with cash flows from their GEO business, limiting their ability to pay back debt in the future. While that fear could have caused the initial drop in the stock/bonds, momentum took over and they continued to fall.

We think that once they announce (likely this Summer), terms with the ECAs, the bonds should rally back to 60-80 while paying a very good yield in the meantime and likely full appreciation by 2027 when they are repaid.

Again, take a look at my previous writeup for info on the LEO constellation as I focus below mainly on GEO revenue/EBITDA/free cash flows and their ability to pay down debt over time.

GEO Supply/Demand/Business Outlook

That market is, I'd say, at this kind of moment in time, sort of stable. I said on our last earnings call when we put our Q1 numbers out, actually seeing some firming in demand in the market right now. Some of that is because there's a segment of our business providing broadband to airplanes, providing broadbands to ships, including cruise ships that had been not surprisingly sort of suppressed during COVID. As the COVID restrictions have come off, then people flying again and going on, on cruises, we've seen that sort of bounce back over the last, I don't know, 9 months or something like that. But overall, I've been in this market for a long time. Yes, I'd characterize it as pretty stable and maybe on balance, yes, kind of slightly positive right now relative to where we've seen it over the last 24-plus months.

The satellite operators here in the U.S. were clearing C-band spectrum. And what that means is about 3/5 of the C-band satellite capacity that we used to be using, we can't use anymore. Now the good thing about that is that there were a lot of dollars coming into the industry to clear that spectrum. But what it means right now is things are pretty tight in North America for C-band.

Telesat Bond Repurchases in the Open Market – Repurchase of 6.5% Senior Unsecured Notes:

·       In March and April 2022, Telesat repurchased the 6.5% Senior Unsecured Notes with a face value of $75.0 million (US$60 million) by way of open market purchases in exchange for $37.2 million (US$29.8 million).

·       In March 2022 Telesat repurchased the 6.5% Senior Unsecured Notes with a face value of $40.0 million (US$32.0 million) by way of open market purchases in exchange for $19.4 million (US$15.6 million). Of this balance, $14.9 million (US$11.9 million) was settled prior to March 31, 2022, with $4.5 million (US$3.6 million) settled in April 2022.

·       These March 2022 repurchases, combined with the related write-off of debt issue costs and prepayment options, resulted in a gain on extinguishment of debt of $21.0 million which was recorded on the first quarter 2022 statement of income.

·       In April 2022, Telesat repurchased 6.5% Senior Unsecured Notes with a face value of $35.0 million (US$28.0 million) by way of open market purchases in exchange for $17.8 million (US$14.2 million).

·       Telesat will surrender these purchased 6.5% Senior Unsecured Notes for retirement.

·       Telesat’s Board of Directors has authorized the purchase of up to US$100 million in face value of additional Telesat debt.

Dish Renewal – one of the other issues affecting the stock/bonds before the Q1 earnings call was uncertainty around Dish’s renewal for their DBS business on Telesat’s GEO satellites. This risk is now gone though the market also hasn’t quite recognized it.

As you know, we had a key contract with the DISH network on our Anik F3 satellite that came up for renewal at the end of last month. As I suggested would likely be the case on our Q4 earnings call in March, we ended up getting a partial renewal. DISH renewed a little more than half the capacity they had previously been taking, although at a rate that's lower than what they had been paying. The renewal is for 2 years with an option to extend for an additional year beyond that. Separately, we entered into a contract with another long-term customer for almost all of the capacity that DISH didn't renew. Capacity that will be used for broadband connectivity for the cruise market. With the DISH renewal and the separate agreement for cruise services, we're well positioned to deliver on our guidance for the year.

GEO Backlog below

·   3% annual revenue decline (after a step up in 2023 post-COVID) and EBITDA margins declining 1%/year as they lose operating

·   $25m maintenance capex in the GEO business; we assume they fund the rest of the LEO build through cash on the balance sheet, ECA funding and C-band proceeds

·   10bps rise in annual interest rate based on a 25bps annual increase in their only variable cost debt, the Term Loan B

·   All free cash flow used to pay down debt, no assumptions on continued buybacks of the debt in the open market

Assuming the above, they can pay down almost all their debt (without any refinancings) and get to negligible net debt by 2030. This assumes no LEO cash flows are used for debt paydown which should really ramp in 2026 but gives us a buffer in case LEOs somewhat cannibalize the GEO base.

There’s also a chance TSAT issues incremental ECA debt above $2bln since the interest rate will almost definitely be above the 15% current yield of the 27s in which case, they use balance sheet cash to buy back more of the 27s. There’s also a chance they announce an equity partner (FAAMG company) in the LEO subsidiary to further defer costs, signaling credibility and further reducing the funding gap. Either would be highly beneficial to the bonds.

Catalyst

Announcement of ECA financing for LEO, continued open market purchases of bonds, LEO equity partner