By Davide Scigliuzzo, Paul Kilby and Natalie Harrison
NEW YORK (IFR) - Intelsat's bonds rallied this week after the junk-rated satellite company agreed to merge with SoftBank-backed OneWeb in a move that could substantially cut its debt load.
As part of the deal, the Japanese conglomerate will inject US$1.7bn of fresh equity into the combined company, giving it a 39.9% voting stake.
But the merger with US satellite start-up OneWeb is contingent on a majority of Intelsat bondholders accepting an exchange offer that will crystallise losses on their holdings.
Intelsat is offering to exchange bonds of wholly-owned subsidiaries Intelsat Jackson Holdings, Intelsat Connect and Intelsat Luxembourg for a mix of new Jackson notes, newly issued common shares and/or cash.
The proposed exchange, which would cut US$3.6bn off Intelsat's total debt, was welcomed by the market, as some Intelsat bonds rallied as much as 17 points on the news.
Even so, all the notes targeted by the exchange are now trading well above the level at which Intelsat has offered to exchange them, signaling that investors are betting on an even better offer from the company.
"The market is signaling that SoftBank may ... need to come back with a better offer," Lindsay Pacia, an analyst at CreditSights, told IFR. "Investors know SoftBank has deep pockets."
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The 7.50% 2021s issued by Intelsat Jackson – the entity that sits closer to the company's assets – had jumped by nearly nine points to 93 cents to the dollar by Thursday, compared with an offer of 86 for the exchange, split between new notes and cash.
The gap was even wider for notes issued by holding entity Intelsat Luxembourg, for which investors said recovery had been as low as zero in the event of a default.
Intelsat Luxembourg's 8.125% 2023s jumped 15.5 points to 57.25, compared with an offer price of just 46.
"The company's fundamental outlook has stabilised, and the fact that there is a bidder out there is positive," said one high-yield portfolio manager who owns the Jackson notes.
"But we are philosophically opposed to accepting something that is less than par, given the amount of value below us in the capital structure."
Pacia of CreditSights said Jackson bondholders should reject the current offer and wait for the company to come back to the negotiating table with a bigger cash consideration.
"SoftBank had about US$25bn of cash on hand at quarter-end, so they have plenty for the capital injection," she said.
If it hits the required 85% participation rate, the exchange could reduce Intelsat's leverage by around two turns to 6.6 times.
"Intelsat's problem is industry overcapacity and high leverage, and this transaction helps them on both ends," said Rahim Shad, senior high-yield analyst at Invesco.
Intelsat bought a minority equity stake in OneWeb in 2015, while SoftBank announced a US$1bn investment in the company late last year, according to Reuters.
Guggenheim Securities and Goldman Sachs acted as financial advisers to Intelsat, while PJT Partners was lead financial adviser to OneWeb and also advised SoftBank.
(Reporting by Davide Scigliuzzo, Paul Kilby and Natalie Harrison; Editing by Marc Carnegie and Matthew Davies)