Notes:

1. DISH DBS Corp secured bonds due 2026 and 2028 are secured by security interests in substantially all existing and future tangible and intangible assets of DISH DBS and its principal operating subsidiaries on a first priority basis, subject to certain exceptions.   Net proceeds from the notes were used to make an intercompany loan to DISH Network pursuant to a Loan and Security Agreement Dated 26 November 2021.  Any collateral pledged as security the holders of the notes are subordinated in right of payment to Dish DBS’ senior unsecured notes. As of 31 December 2023, the balance of the intercompany loan plus interest paid in kind totaled USD $7.496bn. In January 2024, the 2026 tranche of this loan was assigned to EchoStar Intercompany Receivable Company L.L.C. (“EIRC”), a direct wholly-owned subsidiary of SATS. As such, amounts owed in respect f this tranche will be paid directly to EIRC by DISH Network.
2. Dish Network secured bonds due 2027 are secured on a first priority basis by security interests, in favor of the secured parties, in the collateral, which consists primarily of interests in wireless spectrum licenses within the 600 MHz band (“the Spectrum Collateral”) owned by one of the secured guarantors and any additional subsidiaries that may be added as guarantors from time to time and equity interests in the Spectrum Collateral guarantor(s) and DISH DBS Corp.
3. SATS purchased the remaining interest in SNR Wireless Management LLC (“SNR”) for USD $442m on 16 February 2024 using cash on hand.

Overview

EchoStar Corporation (NASDAQ: SATS) operates satellite communications infrastructure and provides a variety of related services to customers in four primary business segments:

(1) Pay-TV. This segment offers services under the DISH® (satellite delivery) and SLING® (streaming deliver) brands. As of 31 December 2023, SATS had ~8.5m subscribers, consisting of ~6.5m DISH TV subscribers and ~2m SLING TV subscribers. This segment contributed ~68% of SATS total revenue for FY2023.

As of 31 December 2023, SATS’ network of satellites serving this segment consisted of the following:

Source: Company filings.

(2) Retail Wireless. This segment offers prepaid and postpaid wireless services to subscribers under brands including Boost® Mobile and Gen Mobile®. SATS currently offers these services primarily as a mobile virtual operator in partnership with other retail wireless service providers, including AT&T and T-Mobile, while SATS completes the buildout of its 5G network. As of 31 December 2023, SATS had ~7.4m retail wireless subscribers. This segment contributed ~22% of SATS total revenue for FY2023.

(3) 5G Network Deployment. SATS is committed to building and deploying a facilities-based nationwide 5G network in the United States. SATS has invested over USD $30bn in wireless spectrum licenses and capitalized an additional USD $9bn in interest relating to the carrying value of these licenses. As of 14 June 2023, SATS network allowed the company to offer 5G service to over 73% of the U.S. population. The company has until 29 March 2024 to complete the final FCC milestone test, under which at least 70% of the U.S. population must be able to access average download speeds of at least 35 Mbps. SATS anticipates it will meet this milestone. This segment contributed ~1% of SATS total revenue for FY2023.

(4) Broadband and Satellite Services. This segment provides broadband services to consumers, including retail and small to medium-sized businesses, along with satellite communications services to telecommunications providers, aeronautical service providers, government entities and enterprise customers.  This segment contributed ~10% of SATS total revenue for FY2023.

As of 31 December 2023, SATS’ network of satellites serving this segment consisted of the following:

Source: Company filings.

SATS controls a significant portfolio of wireless spectrum assets used predominantly by the Pay-TV and 5G Network Deployment segments at current.  This book of assets as of 31 December 2023 from the FY2023 10-K, adjusted for the recent SNR transaction, is highlighted below. SATS is likely to rely on spectrum as collateral for future refinancing efforts.

SATS was founded in 2008 by the spin-off of non-consumer assets and business from what was then renamed DISH Network Corporation (NASDAQ: DISH). SATS acquired DISH Network Corporation on 31 December 2023, reuniting the businesses once again. DISH is a connectivity company that provides television entertainment and technology with its satellite DISH TV and streaming SLING TV services. In 2020, DISH became a nationwide wireless carrier through the acquisitions of Boost Mobile and Ting Mobile. It is currently building a nationwide 5G wireless network. For a more detailed overview of DISH, please see our 1Q23 report.

Recent Events

On 12 January 2024, Debtwire reported that SATS had launched an exchange offer and consent solicitation for DISH 0’s of 2025 and 3.375s of 2026.

On 15 January 2024, Debtwire reported that S&P downgraded DISH DBS secured rating to B- from B and unsecured rating to CCC+ from B- on lower recovery prospects in the wake of SATS’ previously announced asset transfers.

On 16 January 2024, Debtwire reported that SATS commenced exchange offers and consent solicitations for four tranches of notes issued by DISH DBS Corporation.   On the same day, Debtwire also reported that DISH convertible bond holders had organized with legal counsel.

On 17 January 2024. Debtwire reported that Moody’s said the proposed SATS exchanges will likely be viewed as distressed.

On 18 January 2024, Debtwire reported that S&P lowered DISH Network and DISH DBS issuer ratings to CC from CCC+ as the contemplated exchange offers are considered to be selective defaults.

On 22 January 2024, Debtwire reported that the creditor group advised by Milbank had sent a letter to SATS stating their opposition to the proposed debt swap plans.

On 24 January 2024, Debtwire reported that the creditor group advised by Milbank and Lazard had set a deadline for holders to sign a cooperation agreement to join the group.

On 25 January 2024, Debtwire reported that the cooperation agreement for the Milbank and Lazard group had gone effective.

On 29 January 2024, Debtwire reported that SATS terminated the previously announced exchange offers and consent solicitations for certain existing notes issued by DISH DBS Corporation.

On 9 February 2024, Debtwire announced that Moody’s downgraded SATS and its subsidiaries following the DISH acquisition.

On 12 February 2024, Debtwire announced the expiration of the remaining exchange offer and consenting solicitation relating to certain existing DISH notes. This transaction resulted in no notes being exchanged, leaving SATS to return to the drawing board for solutions to its liquidity issues.

On 29 February 2024, SATS announced 4Q23 results after market close. This is the first reporting period for SATS post DISH acquisition, and as such disclosure for prior periods, especially quarterly results, is very limited. SATS reported revenue of USD 4.16bn and OIBDA of negative USD 370m. SATS equity opened down 9% in the 1 March 2024 session and is up ~1% since the report. Credit was marginally stronger with the DISH 11 3/4s of 2027 up~0.5points, the DISH 5 7/8s of 2024 up ~0.5points, the DISH 5 1/8s of 2029 up ~0.5points, the SATS 5 1/4s of 2026 flat and the SATS 6 5/8s of 2026 ~flat on the release.

Financials

SATS reported revenue of USD 17.0bn for FY2023, versus USD 18.6bn for FY2022, a 9% YoY decline, driven again by persistent subscriber churn, especially in the DISH TV business, which shows no sign of stabilizing. The company had 8.5m Pay-TV subscribers as of year-end 2023, down 314,000 QoQ and 1.224m YoY, due to continued persistent cord-cutting, shifting consumer behavior, and increased competition. SATS had 7.378m retail wireless subscribers as of year-end 2023, down 122,000 QoQ and 605,000 YoY, mainly due to ongoing competitive pressures. The company had 1.004m broadband subscribers as of year-end 2023, down 59,000 QoQ and 224,000k YoY. SATS is literally all-in on the wireless segment and the results have yet to provide comfort as to why this strategy makes sense. The following table highlights segment performance year-over-year.

The company’s operating margin for FY2023 was 2.8%, adjusted for meaningful non-cash impairment charges tied mostly to the broadband business, versus 12% in FY2022. Cost of service as a percent of service revenue grew to 59% in FY2023 from 57% in FY2022 while cost of sales (equipment and other) as a percent of equipment sales and other printed 280% in FY2023 versus 202% in FY2022 as SATS pushes the pedal on the wireless business, especially in terms of getting customers devices that are capable of operating on its shiny new 5G network. SG&A as a percent of sales grew to 18% for FY2023 versus 16% for FY2022.

Adj. OIBDA for FY2023 was USD 2.08bn, down from USD 3.41bn in FY2022 due to declines in revenue over the same period and higher overall operating costs. Levered free cash flow was negative USD 670m for FY2023 versus negative USD 6.64bn for FY2022, driven by lower net cash flow from operating activity, flat capex, and meaningfully lower purchases of regulatory authorizations (spectrum assets) in FY2023 versus FY2022.

The company also announced that it has marked its option to purchase the 800Mhz spectrum from T-Mobile to zero, resulting in a USD 1.6bn charge to other income in 4Q23.

Our estimates for the NTM period assume Y/Y revenue declines inline with recent trends, which seems prudent as subscriber losses have shown no signs of slowing. We have assumed Adj. OIBDA margins inline with estimated 4Q23 levels (~9%).  Management noted on the call that they expect to achieve USD 1bn in operating cost savings from current initiatives. We have assumed 50% of this level will be realized in FY2024. We have assumed capex falls to 50% of FY2023 levels as spending on the 5G network build slows from peak levels. Assuming no movement in working capital and the USD 442m SNR remaining stake purchase in February 2024 leaves us with a forecast for negative ~USD 20m in levered free cash flow for the NTM period.

Valuation 

SATS is currently trading at an LTM EV/EBITDA multiple of 11.5x versus a peer average of 7.5x. The NTME EV/EBITDA multiple is 12.2x versus a peer average of 6.9x. Total leverage is 11.0x compared with a peer average of 4.3x, and net leverage is 9.8x versus a 4.1x average for its peers. SATS is massively over levered versus its comparables.

SATS’s secured debt appears to be fully covered based on current estimates and offer yields inline with indices. The company’s unsecured bonds are meaningfully impaired based on current valuation expectations. Given SATS’s poor estimated liquidity profile for the NTM period, we believe a formal restructuring is not out of the question later in 2024 if ongoing financing/refinancing efforts fail to deliver as needed over the next few months. The lower coupon/longer dated unsecured paper may be a compelling short play based on the meaningful gap between valuation estimates and recent prices. That being said, we believe they are being supported by views around asset value (mainly spectrum) versus valuation based on financial performance. Said another way, SATS appears to be asset rich and cash poor.

SATS faces a herculean task vis-à-vis looming maturities and ongoing capital expenditure requirements to complete its 5G network, all at a time when its business continues to shrink. It also remains unclear how SATS wireless business will compete profitably in a marketplace that is already saturated with players in much better financial condition than SATS.

Management noted on the FY2023 earnings call that they are considering a variety of refinancing options and are “not under the gun” to make a swift decision. Clearly their veins are icier than ours as it would appear SATS has but a few months to make some very important decisions that could literally make or break the company.  Management also noted on the recent earnings call that the 10 January 2024 internal asset reorganization leaves SATS with valuable collateral that can be used for future refinancings in the wake of the failed exchange offers, including spectrum and the 3m Pay-TV subscribers.

The following table highlights our current estimates for the value of the spectrum assets owned by SATS based on book value as of 31 December 2023, adjusted for the recent SNR transaction, and the disclosed spectrum asset reallocation announced on 10 January 2024. We have also assumed SNR HoldCo, the holder of the SNR assets, is held by DISH Network Corp.  We see the value, but we do not see the cash flow to support borrowing against the value. Asset sales might be the best path forward for SATS to avoid a formal restructuring, but time is very short indeed, especially given the likely need for significant regulatory approval / oversight to sell the assets in question.

We find it likely that potential lenders also see the value in these assets, but then again SATS’s liquidity profile leaves it with little to no room to accommodate higher interest on refinanced debt, let alone interest on additional debt SATS is likely considering raising to plug the estimated liquidity shortfall over the NTM period. Perhaps solutions that defer interest or PIK structures are going to be available, which could provide some much-needed breathing room. Even then, SATS needs to find a way to return to growth and generate meaningfully more cash to service its debt levels and also navigate potential litigation around the 10 January 2024 announced asset moves to avoid running into deeper trouble. As a wise man once said, there is a lot going on here.