oEutelsat Communications S.A. announced its intention to acquire a 24% stake in OneWeb for $550 million. The company will finance the transaction with EUR296 million of C-Band proceeds and cash from its balance sheet.
oWe expect this transaction to have a limited effect on Eutelsat's financial ratios, with leverage increasing to 3.3x-3.4x in fiscal year 2022 (ending June 30, 2022) instead of 3.1x-3.2x under our previous forecast, and anticipate its free operating cash flow (FOCF) will be roughly in line with our previous assumptions.
oTherefore, we affirmed our 'BBB-/A-3' long- and short-term issuer credit ratings (ICRs) on Eutelsat Communications S.A., our 'BBB-' issue-level ratings on the senior unsecured debt issued by Eutelsat S.A., and our 'BB+' issue-level rating on the senior unsecured debt issued by Eutelsat Communications S.A.
oThe stable outlook reflects our anticipation that Eutelsat will maintain relatively comfortable metrics for the rating over the next two years, including adjusted debt to EBITDA of 3.3x-3.4x, funds from operations (FFO) to debt at or slightly above 25%, and FOCF to debt stabilizing at 13%-14%.
PARIS (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.
We view the deal as a good opportunity for Eutelsat to acquire a foothold in the low earth orbit (LEO) market.
On April 27, 2021, the company announced that it secured a 24% stake in OneWeb (which will be scaled down to 20% once an additional investment is concluded), a provider of LEO satellite services, for $550 million. Eutelsat will finance the transaction with EUR296 million of C-Band proceeds it expects to receive in full in 2022 as well as cash from its balance sheet. The main advantage of LEO satellites is their low latency (less than 100 milliseconds, which compares with at least 250 milliseconds for geosynchronous equatorial orbit [GEO] satellites), which is particularly relevant for cloud, backhaul, and 5G-related applications. LEO satellites could also potentially address the government, mobility, and fixed data verticals, although it will take some time to prove their viability. For example, the high cost of terminals for LEO satellites is an issue for broadband services, and satellite operators will have to lower these costs.
The acquisition is unlikely to have a significant effect on Eutelsat's near-term strategy.
Overall, we do not expect the deal to have a significant effect on the company's business over the short- to mid-term because it will continue to mostly provide GEO solutions (unlike SES S.A. which offers joint GEO/medium earth orbit [MEO] solutions). As such, we currently choose not to consolidate OneWeb's financial metrics with those of Eutelsat. This also reflects Eutelsat's lack of control over, or accounting consolidation with, the target company. Furthermore, we understand the company does not plan to increase its participation or take control of OneWeb in the near term. However, if the LEO technology continues to gain momentum in the coming years, it could become more complementary to the group's offerings and critical to its future growth. Should OneWeb's importance to Eutelsat's business risk profile and overall strategy increase significantly in the future and should Eutelsat materially increase its stake in the company, we could revise our view and consider consolidating the target company in our adjusted metrics on a pro-rata basis.
The difference between the acquisition price and the level of C-Band proceeds will likely only slightly increase Eutelsat's leverage in fiscal 2022.
We now expect the company's leverage to rise to 3.3x-3.4x in fiscal 2022, which is up from about 3.2x under our previous forecasts and from 3.2x in fiscal 2020. The transaction is unlikely to affect Eutelsat's FOCF because we do not consolidate OneWeb in its adjusted metrics. We forecast the company's FOCF to debt will be in the 13%-14% range over the coming years, which is slightly above our previous forecasts, due to its more favorable working capital prospects.
The stable outlook on Eutelsat reflects our anticipation that it will maintain relatively comfortable metrics for the current rating over the next two years, including adjusted debt to EBITDA of 3.3x-3.4x, FFO to debt at or slightly above 25%, and FOCF to debt stabilizing in the 13%-14% range. It also incorporates our view that the company's video segment will remain resilient, allowing it to leverage its portfolio of established orbital positions and partly mitigate the ongoing pressures facing its data segment.
We could lower our rating on Eutelsat if its adjusted debt to EBITDA increases to more than 3.5x while its FFO to debt and FOCF to debt remain below 20% and 10%, respectively. This could occur due to continued revenue erosion amid a worsening trading environment, potentially because of lower-than-expected growth from the fixed broadband and in-flight connectivity segments or a more severe deterioration in its broadcast and government segments. It could also occur due to a combination of higher dividends and capital expenditure (capex) than we currently anticipate or additional acquisitions.
We could raise our rating on Eutelsat if it establishes a clear track record of maintaining adjusted debt to EBITDA of less than 3.0x, FFO to debt of more than 25%, and FOCF to debt of greater than 15%. We would also need to see longer-term credit resilience from the overall business, including a successful fixed broadband strategy and a return to revenue growth, as guided by management.
Related Criteria
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oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oCriteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018
oGeneral Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
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oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
oGeneral Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
oSES S.A., March 19, 2021
oFrench Satellite Services Company Eutelsat Communications S.A. Affirmed At 'BBB-/A-3'; Outlook Stable, Dec. 8, 2020
oSES S.A. Aims To Use First C-Band Compensation Payment To Contain Leverage, June 19, 2020
oEutelsat Communications' Credit Metrics Are Not Materially Affected By COVID-19, April 14, 2020
oSES's 2019 Results And Revised Guidance Confirm Difficulty To Return To Growth, March 16, 2020
oThe FCC's Proposed Payments To Satellite Operators Could Provide SES S.A. With Welcome Ratings Headroom In 2021, Feb. 7, 2020
oEutelsat Communications S.A., Dec. 13, 2019
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