The financial crisis has brought with it heavy involvement by export credit agencies (ECAs) in satellite financings for companies based in developed countries, ensuring the steady flow of credit to keep infrastructure spending on track and keep production lines busy on high-value satellite equipment.

With their typically strong cashflows and rising demand for transponder capacity, many of these companies would have been able to raise non-recourse project debt with commercial banks in 2005 or 2006.

But ECA support has now become a critical part of the funding structure – and has considerably lowered the cost of funding. Bankers see this as a permanent change. In contrast to the aircraft sector, where the vast volumes of ECA guarantees for funding Airbus and Boeing deliveries makes analysts forecast that the ECAs will have to scale back at some point, the numbers involved in the satellite sector are more modest, at $2 billion to $3 billion.

Both the US and EU are determined to support their hi-tech industries, and are likely to step up with guarantees where needed. And for satellites built in the United States, deals will often feature both US Ex-Im and a European ECA, since the leading launch services provider continues to be Arianespace.

In spite of the complexities of having both US Ex-Im and Coface in on transactions, and the long lead times needed to negotiate loan terms and covenants, bankers are bringing a steady flow of deals to financial close.

The high level of activity is underpinned by growing demand from telecoms providers and TV broadcasters, which has led to an urgent need for infrastructure upgrades. The delivery of broadband to rural areas has become a major source of business for many telecoms providers, and available space on new or upgraded satellite systems is being rapidly taken up. Broadband applications on mobile phones are also contributing to a rapid run up in demand. In addition high definition TV and 3D TV are adding to the capacity requirements of TV providers.

In mid-November Arianespace was doing the final preparations for its fifth mission of 2010, moving the Ariane 5 rocket to the final assembly building at its spaceport in French Guiana. It is carrying a dual payload. The first comprises Intelsat 17, built by Space Systems/Loral, which will provide coverage across Asia and into Europe and Africa, replacing the Intelsat 702 satellite which was launched in 1994 and carries video signals for Asian distribution.

Also on board is the HYLAS 1 satellite, designed and built by EADS Astrium for UK-based satellite broadband operator Avanti Communications. This will provide high-speed broadband for mostly rural users across Europe via wide customer base of telecoms providers serving residential, enterprise and institutional users.

And just ahead of the planned 25 November launch for HYLAS 1, Avanti was reaching financial close on HYLAS 2, which will launch in the second quarter of 2012, extending coverage to Africa and the Middle East. HYLAS 3 is currently in design.

Avanti Communications signed an ECA-backed project finance facility to build and launch Hylas 2. The $328 million package includes a $216 million direct US Ex-Im facility and a $112 million Coface guaranteed loan, provided by Barclays Capital. It has a ten-year tenor, with amortisation beginning after two years upon launch and commissioning of the satellite.

“Since the financial crisis the ECAs have become very active in supporting for financings in high-income OECD countries,” notes a banker.

Barclays Capital advised Avanti and was sole adviser on the US Ex-Im direct loan and sole arranger on the Coface loan. The satellite is being built by US-based Orbital Sciences Corporation, while Coface is providing support because the satellite will be launched by Arianespace.

The original lenders for HYLAS 1, including holders of payment-in-kind notes, were repaid after an equity raising exercise. Avanti was able to take advantage of improved stock market conditions to complete a placement in July, raising £70 million ($112 million) with the sale equivalent to around 23.7% of the company’s existing ordinary share capital. Avanti is listed on the London Stock Exchange.

The original debt associated with HYLAS 1 was drawn down in 2007 and was due for repayment in 2014. This was negotiated with an attractive early repayment premium.

Paying off the HYLAS 1 lenders simplified the negotiations for the HYLAS 2 financing, which had already been under way for several months and up to that point had involved six parties; Avanti, US Ex-Im, Coface, Barclays Capital, Natixis as provider of stabilised commercial interest reference rate (CIRR), which sets out minimum interest rates for ECA supported projects, and the HYLAS 1 group of lenders.

“This was a complex transaction with six different stakeholders and four sets of lawyers working together,” says Nick Stockdale, director in the capex financing solutions group at Barclays Capital in London. “Avanti successful raised equity, which in conjunction with our financing enabled them to prepay the initial PIK financing.”

Iridium comes back

In late October a much bigger financing successfully reached financial close, with Iridium Communications syndicating an ECA-backed loan for its planned new array of satellites.

Nasdaq-listed Iridium has an existing constellation of low earth orbiting cross-linked satellites, and is the only system that offers total global coverage. Because of this its customers include many international government agencies, the US Department of Defence, as well as commercial networks.

“In June Iridium Communications signed a fixed-price contract with Thales Alenia Space for the design and construction of 72 satellites for the Iridium NEXT constellation, having already had a promise of guarantee to cover 95% of a $1.8 billion credit facility for the project issued by Coface in April,” says Henrik Schliemann, London-based managing director at corporate and debt advisory firm Hawkpoint.

“The project finance facility is notable for having a long average life, since amortisation does not start until the new constellation has been gradually phased in, with a series of launches between 2015 and 2017,” Schliemann explains. “The debt facility was oversubscribed, and together with internal company cashflows all the financing is now in place for the NEXT constellation, which will have a total cost of approximately $2.9 billion.”

The facility is provided by a syndicate of nine banks led by Deutsche Bank, Banco Santander, Societe Generale, Natixis and Mediobanca. It also includes BNP Paribas, Credit Industriel et Commercial, Intesa SanPaolo and UniCredit. Thales Alenia Space is a joint venture between Thales (with 67%) and Finmeccanica (with 33%). Iridium is headquartered in McLean, Virginia.

In addition to its large size, the Iridium deal is also notable for the make-up of the group of banks acting as lead managers. Deals involving Coface are often heavily skewed towards French banks, but on this deal only two out of five, Societe Generale and Natixis, are French. Deutsche Bank, Santander and Mediobanca are all getting the opportunity to earn some ECA-backed loan arranger fees. Societe Generale, Goldman Sachs and Hawkpoint advised Iridium in connection with the financing.

“We are extremely pleased with the size of the facility, which together with internally generated cash flow, we continue to believe is sufficient to fully fund our next generation of satellites,” comments Tom Fitzpatrick, CFO at Iridium. “We are also pleased with the facility’s highly attractive funding cost, long-term nature, and with the covenants and other terms that have been agreed.”

Commercial bank debt

In the highly liquid markets in the years running up to the financial crisis it was possible to fund satellite deals with uncovered commercial bank debt. For example back in 2005 Madrid-based Hispasat signed a club deal that replaced, at lower cost, two previous facilities dating back to 2001 and 2003, which financed the construction and launch of Hispasat satellite 1D and Latin American satellite Amazonas. The 2005 facility was provided by BBVA, BNP Paribas, RBS, Lloyds TSB, La Caixa, Banesto and Banco Sabadell.

The favourable conditions in the market at that time made it possible to structure a longer-term loan, this time six years, at a variable rate and with a significantly lower margin. At that time support from the European ECAs or US Ex-Im would have been unlikely for borrowers in developed countries in Europe of the United States.

But Hispasat was arranging new debt facilities in 2010, and this time round it has the backing of both US Ex-Im and Coface. The amortising 8.6-year debt package was provided by BNP Paribas and BBVA, each accounting for $89 million.

Hispasat is the seventh largest satellite company in the world by revenues, and the leader in dissemination and distribution of content in Spanish and Portuguese. In 2009 it increased its net profit by 50.3% to Eu70.6 million.

Such a robust sponsor, and the cashflows generated by a high quality client portfolio including firms involved in HDTV, broadband, VoIP, telecoms and radio, as well as corporate and government customers, would make Hispasat a sure bet for commercial project debt in normal market conditions.

In October Hughes Network Systems, a global leader in broadband satellite networks and services, announced the signing of a $115 million loan agreement with BNP Paribas and Societe Generale to finance the launch of Jupiter, its high throughput, Ka band satellite. Arianespace has been contracted by Hughes to launch the satellite in the first half of 2012, so Coface has come in with a guarantee.

Loan drawdowns will occur over the launch vehicle construction period leading up to the launch, and the terms of the loan include a fixed interest rate of 5.13% and a repayment period of 8.5 years starting after launch.

Of course the ECAs could pull back at some point, and leave the commercial banks fund the satellite sector again, especially given the strong cashflows associated with the sector. But the general industry view is that the financial and economic crisis have led both the USA and EU countries to permanently step up strategic support for their export industries, and that ECA-backed financings into highly developed OECD countries are here to stay.