Overview: Satellite operator Telesat (TSAT) reported 2Q24 financial results that were better-than-consensus estimates, and despite the decline in revenue and adjusted EBITDA, the company affirmed its FY24 guidance. With Broadcast and Enterprise revenues declining, it is important for TSAT’s geosynchronous (GEO) satellite services business (15 geostationary satellites) to stabilize cash flow until the transition to low earth orbit (LEO) satellites occurs in 2026-2027. It will be a tricky balancing act as the company’s revolver expires in December 2024, and it has CAD 2.4bn of debt maturing in December 2026. The company’s overall focus remains on maximizing EBITDA and cash flow for GEO by managing its legacy cost structure, as well as accelerating the implementation and commercialization of Telesat Lightspeed that includes closing its funding agreements, increasing staffing, and building out all elements of the network including satellites, ground infrastructure, and software.

The biggest issue facing the company’s Broadcast business is that the direct-to-home (DTH) business is weak and renewals are occurring at lower rates. The October renewal with EchoStar for the Nimiq 5 satellite is likely to result in a materially lower rate. In addition, Xplore is currently restructuring and has only been making partial payments, and TSAT has been booking bad debt expenses for unpaid services. The Xplore contract runs until January 2027. For the Enterprise business, TSAT is dealing with a decline in the maritime services segment as contracts have been lost to Starlink.

On 30 June 2024, TSAT’s fleet utilization was 75%, down from 77% on 31 March, 85% on 31 December 2023 and 87% on 30 June 2023.

Concerning its Lightspeed financing, TSAT said that it is still in discussions with the Government of Canada (GoC) and Government of Quebec and there is optimism that the agreements will be completed by the end of the summer. Back in March, TSAT reported that the GoC agreed to terms on a CAD 2.14bn loan for Telesat Lightspeed with the GOC receiving warrants for 10% of the common shares of Telesat LEO Inc based on an equity valuation of USD 3bn. The 15-year loan to Telesat LEO Inc would carry a floating interest rate of 4.75% above the Canadian Overnight Repo Rate Average (CORRA) with interest payable in kind (PIK) during the project’s construction period, followed by a 10-year sculpted amortization.

TSAT said that its prime satellite contractor, MDA Space Ltd, has onboarded 90% of the suppliers for the Lightspeed program, and that TSAT’s headcount has risen 20% year-to-date (YTD) due to staffing for Lightspeed.

It was reported in July that a creditor group holding more than 75% of TSAT’s term loan and about 35% of its secured notes is looking to start discussions with the company regarding repaying the 2026 maturities. The issue is that the current debt stack has maturities in 2026 and 2027 during the launch and commercialization stage of the LEO program. There is concern among creditors that they are in an unenviable position with Telesat LEO in an unrestricted subsidiary, and the future of the company is dependent on that business. There is a possibility that TSAT could offer a distressed exchange to current creditors with an equity kicker in LEO.

On a valuation basis, we looked at TSAT’s GEO business, excluding LEO, and LEO’s equity valuation based on 2032 estimated revenues. We find that GEO’s secured debt at a 3.5x EV multiple would recover 56% with no recovery for unsecured notes. Based on current trading levels, it appears that the market is ascribing approximately CAD 500m of equity value for LEO.