dani3315/iStock via Getty Images
The following segment was excerpted from this fund letter.
Inmarsat
Inmarsat is a British satellite telecommunications company offering global mobile telephone and data services via a constellation of 14 geostationary satellites and associated ground stations.
The company delivers voice and broadband communication, remote monitoring and control, and emergency and military communications to customers in a wide range of industries, including aviation, maritime, government, energy and agriculture. Supporting mission-critical business and government applications, the company has long-term contracts with most customers making for good visibility with respect to future revenues.
Moreover, given that the satellite system and supporting infrastructure is already in place, capital expenditures are limited, providing the opportunity to grow cash flow to permit investment for growth as well as the ability to de-lever.
Given the vital role the company plays and net leverage at a reasonable 5.2x, we became comfortable with the credit and initially purchased the company’s 6.75% first lien bond, due October 1, 2026, in February 2020 at approximately a 5.21% yield to the October 2024 call.
With the advent of COVID in March 2020, the bond’s yield briefly spiked over 11%, but retraced back toward 5% by year-end. In 2021, the yield remained in the 5.5-6.0% range, but since the beginning of 2022, has risen with rates and credit spreads to a yield-to-worst above 9%, where we bought it during 2Q22.
On November 8, 2021, the company announced that it was being acquired by Viasat (NASDAQ:VSAT), a U.S. provider of satellite services similar to Inmarsat. On a stand-alone basis, Inmarsat’s net leverage has declined from 4.6x at the time the deal was announced to 4.1x at 1Q22 on the strength of EBITDA growth and higher free cash flow. Pro forma leverage for the combined company will initially be 5.0x, but, per Viasat’s projections, is expected to decline to 4.0x by the end of 2024.
As the Inmarsat bond does not have a change of control put, Viasat is assuming the bond and it will remain outstanding, retaining the benefit of its first lien on the Inmarsat assets, post-transaction. Our confidence in the bond is further supported by the fact that, in February 2022, Standard & Poor’s put it on Watchlist for a rating upgrade from its current B+ level.
Lastly, pending the resolution of long-running litigation concerning the ability of Ligado Networks, a satellite communications company, to use certain radio frequency spectrum, Inmarsat may be entitled to as much as $1 billion that would likely be used to reduce debt, thereby further improving the credit quality.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Be the first to comment