Mexican Satellite Firm's Future Might Hinge on New Spacecraft

Satellite fleet operator Satmex of Mexico, unable to finance its planned Satmex 7 satellite and boxed in by payment obligations to the Mexican government and restrictive post-bankruptcy debt covenants, faces the risk of "customers" quitting the company if it cannot replace a satellite already past its planned retirement date, Satmex Chief Executive Patricio E. Northland said Jan. 27.

In a sometimes contentious conference call with investors, Northland said Satmex, which in November 2006 emerged from Mexico's equivalent of the U.S. Chapter 11 bankruptcy proceedings and was unsuccessful in auctioning itself, has no choice but to secure new satellite capacity. He said he is determined to seek ways to rebuild Satmex's business.

The most critical near-term requirement for the company, he said, is to order a Satmex 7 satellite to replace the Solidaridad 2 spacecraft at 114.9 degrees west. Solidaridad 2, launched in October 1994, is already in inclined orbit, meaning it no longer uses its remaining fuel to keep itself stable on its north-south axis.

Satmex said in a November filing to the U.S. Securities and Exchange Commission (SEC) that the satellite, which is no longer insured, carried no commercial customers. Northland said efforts continue to sell Solidaridad 2 to the Mexican government.

Satmex also operates the Satmex 5 spacecraft at 116.8 degrees west. A Boeing 601 model launched in December 1998, Satmex 5 has lost its backup xenon-ion electric propulsion system, a failure that was common to that generation of 601 spacecraft. For now, the remaining propulsion system is working correctly. But Northland said Satmex 5 is "one of the greatest operational risk factors in Satmex's business."

Satmex 5's conventional fuel would be capable of operating the satellite for around three years if the remaining xenon-ion propulsion system failed, Satmex told the SEC. Satmex 5 was insured for $90 million under a policy scheduled to expire in December 2008. Northland did not say whether the policy had been renewed, and he declined to discuss revenue, satellite fill rates or other operational results for 2008, saying the figures had not yet been audited.

"The company's other satellite, Satmex 6, is a Loral 1300 model launched in May 2006 that constitutes Satmex's most stable asset. The satellite is expected to operate until 2021. It is insured for $288 million under a policy that expires in May.

Satmex's new chief financial officer, Luis Stein, said the company's revenue for the nine months ending Sept. 30, 2008, was $84 million, including $68.3 million coming from the core business of selling transponder capacity from Satmex spacecraft. Satmex also owns a small digital distribution company, called Alterna TV, and owns 75 percent of a broadband services provider, Enlaces Integra.

The satellite transponder lease business reported that EBITDA, or earnings before interest, taxes, depreciation and amortization, was 71.5 percent of revenue — for the first nine months of 2008. Satellite business backlog as of Sept. 30 was $164.2 million.

Satmex debt at the time was $402.9 million.

When it emerged from bankruptcy, Satmex owners tried to sell the company, but found no takers after it set a price floor considered unrealistic by several potential buyers. These prospective buyers also cited the Mexican government's rights to Satmex revenue and capacity as a deterrent factor.

Under its Mexican government license, Satmex must provide the Mexican government with 362.9 megahertz of capacity. In addition, the company told the SEC that it paid $41.7 million in orbital concessions during the first nine months of 2008, the same amount as 2007.

Northland became Satmex chief executive in May 2008. He said he has shed staff and is instituting other reforms to assure that Satmex sells its capacity at market rates to stable, long-term customers such as video broadcasters and more government agencies.

He said the company's obligations to the Mexican government are a permanent drag on financial performance. He declined to say whether Mexican authorities have indicated they will modify Satmex's license conditions.

Satmex in mid-2008 hired an investment adviser Perella Weinberg Partners to seek potential investors in Satmex 7, and agreed to make $3 million in advance payments to satellite manufacturer Space Systems/Loral so that, once full financing was available, construction could move quickly.

But six months of effort have produced no investors, and the current global financial downturn has not helped matters, Northland said.

During the conference call, two investors questioned whether the still debt-laden Satmex had the right to engage in a Satmex 7 investment program given its restrictive agreements with its creditors. These agreements force Satmex to return any net cash beyond $5 million in a given quarter to its bondholders.

Northland did not directly answer the questions but said Satmex would abide by the terms of its debt agreements and seek its creditors' approval before committing to the construction program.

"Having said that, my obligation as a manager is to continue to pursue [avenues to assure] the continuity of the business," Northland said. "The longer we wait for Satmex 7, the operational risk exists of a possible reduction in revenue as customers might start migrating to other alternatives."

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