Inmarsat tweaks US$1.75bn LBO loan to meet investor demand

By Aaron Weinman

NEW YORK, Sept 24 (LPC) - UK telecommunications and satellite operator Inmarsat on Monday revised its US$1.75bn leveraged loan as investors, wary of a cooling economy, raised concerns about the company's leverage, limited cash flow and increased competition in the telecommunications and satellite operations industry, sources familiar with the transaction told Refinitiv LPC.

Inmarsat, which will use the term loan B to support its purchase by a consortium of investors led by Apax Partners, decreased the size of the term loan B by US$700m from US$2.7bn and increased its concurrent bond to US$1.825bn from US$1.125bn on September 20. Inmarsat on Monday again cut the size of the loan by US$250m and upsized the bond to make up the difference.

“There is a lot of capex required and high leverage. So there is little room for error (for Inmarsat),” said one portfolio manager that looked at the transaction.

To attract investors, Inmarsat also increased the interest rate on the loan. The company will pay lenders at a rate of 450bp over Libor compared to the proposed range of 400bp-425bp. The original issue discount was revised to 98 cents on the dollar versus a prior discount of 99 cents and a 1% Libor floor was embedded into the transaction, banking sources said.

Barclays, Bank of America Merrill Lynch and UBS arranged the deal.

Two years of high capital expenditures led to modest cash flow numbers in 2018 and 2017. Inmarsat logged US$10.5m in free cash flow at the end of 2018 and US$41.2m for the end of 2017, according to the company's financials.

Though the satellite operator recorded US$170.7m in cash flow for the first half of 2019, cash flow is expected to be limited over the next two years due to high capex requirements, according to an offering memorandum for Inmarsat's bond sale obtained by Refinitiv LPC.

Heightened competition in the global communications industry will also require greater investment from the company as it looks to keep up with its rivals.

Companies in the fixed-satellite services sector are attempting to gain market share through lower costs, while others such as US-based Iridium Communications have invested heavily in new equipment and technology.

In the mobile-satellite service sector, Inmarsat is under regional pressure from peers such as Globalstar and Thuraya Telecommunications that have both added more satellites in orbit, according to sources.

Apax, along with Warburg Pincus, the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan in March made a cash offer of US$7.09 for each Inmarsat share, valuing the purchase at about US$3.4bn.

Inmarsat, rated BB by S&P Global Ratings, had its loan rated B+ on September 10 by the ratings agency. The loan’s rating is hamstrung by a capital structure that is roughly 6.0 times levered on an adjusted debt-to-Ebitda basis. This level should dip, however, to around 5.5 times in 2020 and between 5.1-5.3 times in 2021, S&P said in its report.

Inmarsat declined to comment.

RECESSION FEARS

As global recession fears have mounted over the last three months, US-based investors started demanding greater returns for leveraged loans. They favor deals for higher-rated companies better-placed to weather the potential slowdown in global growth over riskier borrowers languishing in the low single B-rated territory that carry a larger default risk in the event of a downturn.

In August, at least five single-B rated borrowers withdrew transactions from the syndicated loan market amid low demand, while Inmarsat is one of at least four companies to revise their deals in the last week.

Digital imaging company Shutterfly, which is raising debt to back its acquisition by Apollo Global Management, reduced its loan to US$1bn from US$1.285bn, increased the margin to 550bp over Libor from 525bp, amended the discount to 97 cents on the dollar from a range of 98-99 and implemented a series of lender-friendly changes to the loan documentation.

Automotive artificial intelligence firm Cerence revised a US$425m loan to support its spinoff from conversational AI platform developer Nuance Communications.

The company on September 20 sweetened the spread to a range of 425bp-450bp over Libor after initially guiding it at 375bp, while the discount was amended to 99 from 99-99.5 cents on the dollar.

And auction house Sotheby’s on Monday widened the margin to 550bp over Libor from a range of 450bp-475bp for a US$500m loan backing its acquisition by French media and telecom entrepreneur Patrick Drahi.

“Leverage and add-backs paint a dangerous script. The fact there’s pushback on certain transactions means there is some recognition of risk,” said Tim Gramatovich, chief investment officer at Gateway Credit Partners. (Reporting by Aaron Weinman. Editing by Michelle Sierra and Leela Parker Deo.)