Intelsat S.A. – Satellite Giant Files Chapter 11 ($17bn in Liabilities) Citing Expensive $1.1bn Annual Debt Servicing Bill, COVID-19 and “Mission Critical” Need for $1bn Necessary for C-Band Clearance Project (5G Wireless)

[Developing Story] May 14, 2020 – Intelsat S.A. and 34 affiliated Debtors (NYSE: I; “Intelsat” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Eastern District of Virginia, lead case number 20-32299. The Debtors, one of the world’s largest satellite services businesses, are represented by Michael A. Condyles of Kutak Rock LLP. Further board-authorized engagements include (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii) Alvarez & Marsal North America, LLC as restructuring advisor, (iii) PJT Partners LP as financial advisors and investment banker, (iv) Deloitte LLP as tax advisor and (v) Stretto as claims agent. 

The Debtors’ lead petition notes between 5,000 and 10,000 creditors, estimated assets of $11.7bn and estimated liabilities of $16.8bn. Documents filed with the Court list the Debtors’ seven largest unsecured creditors as (i) U.S. Bank National Association (Trustee for $8.9bn 8.125% Senior Notes due 2023), (ii) U.S. Bank National Association (Trustee for $3.1bn 8.5% Senior Notes due 2024), (iii) U.S. Bank National Association (Trustee for $2.0bn 5.5% Senior Notes due 2023), (iv) U.S. Bank National Association (Trustee for $1.9bn 9.5% Senior Notes due 2025), (v) U.S. Bank National Association (Trustee for $1.25bn 9.5% Senior Notes due 2023), (vi) U.S. Bank National Association (Trustee for $431.2mn 7.75% Senior Notes due 2021) and (vii) U.S. Bank National Association (Trustee for $402.5mn 4.5% Convertible Notes due 2024).

On April 15th, the Debtors filed an 8-K announcing that they would not make an April 15th interest payment of $125.0mn due on their 8.50% Senior Notes due 2024 and would avail themselves of a 30 grace period in respect of that missed payment. Failure to make that payment by May 15th would result in an event of default under those notes and cross-default through the Debtors' capital structure. The Debtors will not be making that payment. 

As announced in the 8-K, the Debtors need the "financial flexibility" that the non-payment of $125.0mn of interest assists; this flexibility necessary for the Debtors' "mission critical" need to participate in the the build-out of 5G wireless infrastructure; with participation in 5G hinged on the Debtors being in position "to spend more than $1 billion on clearing activities. These clearing activities must start immediately…" The Tolley Declaration (defined below) adds: "By the end of the second quarter of 2021, the Company anticipates spending over $800 million in cumulative clearing costs—before  receiving a penny of reimbursement."

The $125.0mn missed interest payment is but a small part of an annual debt servicing tab of over $1.1bn. The Tolley Declaration (defined below) notes: "The Company’s annual debt service payments exceed 50 percent of the Company’s 2019 revenues…The Company is also subject to higher interest rates than its competitors, with a significant amount of debt carrying an 8.5% or higher interest rate compared with a range of current yields for unsecured indebtedness of certain of the Company’s peers of 2.3% to 5.9%."

In a press release announcing the filing, Intelsat advised that “it has undertaken a financial restructuring to position the Company for long-term success. The restructuring process is intended to enhance the Company’s liquidity and will likely result in a substantial reduction of Intelsat’s legacy debt burden, allowing for Intelsat to emerge with a strengthened balance sheet to complement its strong operating model and future growth plans. 

One of the primary catalysts for restructuring the balance sheet now is Intelsat’s desire to participate in the accelerated clearing of C-band spectrum under the Federal Communications Commission order in support of a build-out of 5G wireless infrastructure in the United States. To meet the FCC’s accelerated clearing deadlines and ultimately be eligible to receive $4.87 billion of accelerated relocation payments, Intelsat needs to spend more than $1 billion on clearing activities. These clearing activities must start immediately, long before costs begin to be reimbursed."

Stakeholder Involvement

Conspicuously absent from the Debtors' filing announcement, is any mention of specific stakeholder support or even the source of the DIP financing (the latter ultimately obliquely identified in a Court filing as as an ad hoc group of holders of prepetition term loans and notes).

In a Court filing, the Debtors do, however, note that [potentially rival] camps are forming: "Several creditor groups began to form in early April. The Debtors swiftly entered into nondisclosure agreements with the creditor groups and, as previously discussed, initiated discussions regarding the potential contours of a financing to fund the Debtors’ working capital needs and allow the Debtors to progress their C-band spectrum clearing activities. The Debtors also received and began evaluating potential restructuring transactions proposed by certain of their creditor groups. The Debtors will continue to engage with all stakeholder groups with the aim of driving a consensual resolution for the benefit of all stakeholders."

DIP Financing

The Debtors press release adds: "Intelsat has secured a commitment for $1 billion of new financing. Subject to Court approval, this debtor-in-possession financing, coupled with significant cash on hand and positive cash flow generated by the business, will provide ample liquidity during the restructuring process to support ongoing operations, fund the substantial upfront C-band clearing costs, and allow the Company to continue investing in the innovations and services that customers need today and in the future." 

Court filings add the following as to the source of the DIP financing: "Among these proposals was a $1 billion superpriority senior secured priming multi-draw term loan credit facility (the 'DIP Facility') proposed by an ad hoc group of holders of approximately half of the Debtors’ secured term loan and secured notes (the 'Intelsat Jackson Ad Hoc Group')."

Significant Prepetition Shareholders

• Serafina S.A.: 34.1% (Serafina is an acquisition vehicle set up by BC Partners and Silver Lake to acquire Intelsat from Apollo, Apax et al in 2008)
• Cyrus Capital Partners L.P.: 7.6%
• Appaloosa LP: (7.4%) 
• Discovery Capital Management LLC: 6.1%

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Tolley Declaration”) [Docket No. 6], David Tolley, the Debtors' Executive Vice President,Chief Financial Officer,and Co-Chief Restructuring Officer, detailed the events leading to the Debtors' Chapter 11 filing.

The Tolley Declaration provides: “The Debtors have commenced these cases to efficiently access capital and engage with stakeholders through a chapter 11 process. The Debtors require this capital to meet two unexpected, external challenges that have recently arisen. Specifically, the Debtors require sufficient capital to (a) comply with the FCC’s February 28,2020 order to “clear” operations from the 3700–4000 MHz radio frequency spectrum and obtain up to $4.87 billion in Accelerated Relocation Payments, and (b)address the significant reduction in revenue and cash flow associated with the ongoing COVID-19 pandemic.

Prepetition Indebtedness

As of the Petition Date, the Debtors had approximately $14.8bn in total outstanding funded debt obligations, with annual debt service payments totaling approximately $1.13bn, as presented in the following table:

About the Debtors

Intelsat S.A. is a publicly held operator of one of the world’s largest satellite services businesses, which provides a diverse array of communications services to a wide variety of clients, including media companies, telecommunication operators, internet service providers, and data networking service Providers.

The Debtors add: "Through its global and extra-terrestrial network of satellites and teleports, the Company provides diversified communications services to the world’s leading media companies, fixed and wireless telecommunications operators, data networking service providers for enterprise and mobile applications in the air and on the seas, multinational corporations and internet service providers in the most challenging and remote locations across the globe. The Company is also the leading provider of commercial satellite communication services to the U.S. government and other select military organizations and their contractors. The Company’s administrative headquarters are in McLean, Virginia, and the Company has extensive operations spanning across the United States, Europe, South America, Africa, the Middle East, and Asia."

Corporate Structure Chart

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