Ten years ago satellite operator Iridium was a salutary lesson in the perils of applying project finance to the fast-growing tele­coms industry. In 2010, however, it brought the largest and most complex of a series of export financings for satellite projects to market. The $1.8 billion Coface-covered deal is notable for its size, as well as for featuring both fixed and floating tranches. The deal is the largest ever for Coface in the telecoms sector, at a time when the French export credit agency has been ex­tremely active supporting satellite operators.

Iridium Communications is US listed, and the successor to the Motorola-backed venture that declared bankruptcy in August 1999. The old Iridium tried to interest businessmen and consumers in its handsets, but was hampered by their poor performance indoors and a glut of satellite operators. The new Iridium, formed by a group of private investors to buy the original constellation out of bankruptcy in December 2000, has been profitable since 2004.

However, the original constellation of satellites, which narrowly avoided deactivation before the acquisition, is now reaching the end of its natural life, and the state of the art in mobile communications has moved on. In 2008, Iridium started looking at how to procure and finance an upgrade to its satellite network, received 60 responses to its request for proposals, and by 2009 had narrowed its cast down to Loral, Lockheed and Thales.

The new constellation, which the operator dubbed Iridium NEXT, involves buying 81 satellites, to replace the 66 (plus seven spares) that it currently has in orbit, and have enough for spares, both in orbit and on the ground. The new satellites ideally would be ordered in one batch, although they will be launched from 2015, and into the first half of 2017. The US Department of Defense is an anchor customer, accounting for 25% of Iridium’s revenues, and insisted that final assembly takes place in the US.

The size of its order presented a challenge to arranging financ­ing, but it gave the operator considerable leverage in the buying process. Vendors are prepared to tailor their manufacturing processes to a buyer’s needs and governments are prepared to offer backing to a strategic industry using export credit agencies. Given the state of credit markets from 2009, the export finance offering was inseparable from the product. The choice eventually came down to ThalesAlenia (Thales 67% and Finmeccanica 33%) with Coface support and Lockheed with US Ex-Im support.

Iridium hired three financial advisers: Goldman Sachs, for its familiarity with US Ex-Im, SG, for its familiarity with Coface, and Hawkpoint, its long-standing corporate adviser. Lockheed was an early favourite, if only because it had built the first Iridium network, but Coface support has made the French space industry highly competitive. Coface, on top of its flexibility about the extent of French content, was also prepared to offer Iridium a floating rate tranche, something that not all ECAs can do.

ThalesAlenia won the contract in June 2010, alongside a Coface promise of guarantee. The $1.8 billion in Coface-covered debt has a 14-year term, a grace period on principal repayment until oper­ations begin in 2017, and 95% commercial cover. It is split into a $1,537 million fixed-rate tranche, which priced at 4.96%, and a $263 million floating rate tranche priced at 195bp over Libor.

The financing includes covenants relating to corporate debt levels that would be familiar to a corporate financing, while providing security and draws-down provisions that might be more familiar to a project finance lender. As Iridium noted at the time, the financing was not contingent on the borrower raising additional debt or equity, and the promise was sufficient for Iridium to issue a notice to proceed to the contractor while it set about syndicating down the debt.

Selling the deal involved overcoming several lender misgivings, including those from lenders that had written off debt owed by the old Iridium. While the Department of Defense is an anchor customer under a long-term agreement, gain­ing un­limited access for 20,000 users through its own gateway in Hawaii, the remainder of Iridium’s capacity is sold through resellers on to third-party customers, who can cancel at will. While the end-users are often very large entities such as shipping lines, mining com­panies and government agencies, they can terminate service at will.

Iridium has selected SpaceX, a start-up founded by Elon Musk, to launch the new constellation. SpaceX has a limited track record, which makes lenders nervous, given the number of uncertainties associated with launching satellites into orbit.

The financing was oversubscribed, with SG, Natixis, Santan­der, Deutsche Bank and Mediobanca taking mandated lead ar­ran­ger titles, based on their willingness to make large under­writing commitments and negotiate the deals’ documentation. BNP Paribas, CIC, Intesa Sanpaolo, UniCredit participated as lead arrangers. The financing is notable not just for its heavy French participation, though Credit Agrocile is conspicuous by its absence, but for taking place dur­ing a period when several European economies were exhibiting signs of stress. This uncertainty was significant because so much of the contract was denominated in Euros, and Iridium was under considerable pressure from lenders to hedge its foreign exchange exposures.

The satellite contract accounted for $2.1 billion of the project’s roughly $3 billion total cost, and Iridium is set to fund the remainder of the costs with the $261.5 million in warrant proceeds and internally-generated cashflow. Using this cashflow as equity, rather than offering it to lenders during construction, allows the operator to avoid further dilutive equity offerings. This degree of leverage with vendor and lenders highlights why Iridium got the best terms of any satellite borrower, and even any Coface-backed satellite borrower, in 2010.

Iridium Communications, Inc
Status: Signed 28 October 2010
Size: $2.9 billion
Location: US-headquartered
Description: Export financing for 81 new low-orbit satellites for voice and data provider
Sponsor: Iridium
Debt: $1.8 billion
Export credit agency: Coface
Mandated lead arrangers: SG CIB, Natixis, Santander, Deutsche Bank, Mediobanca
Lead arrangers: BNP Paribas, CIC, Intesa Sanpaolo, UniCredit
Financial advisers: Goldman Sachs, Hawkpoint Partners, Societe Generale
Sponsor legal adviser: Milbank Tweed
Lenders’ legal adviser: Allen & Overy
Technical consultant: Aerospace Corporation
Market consultant: Euroconsult
Insurance consultant: Jardine Lloyd Thompson
Tax consultant: PricewaterhouseCoopers