Connect Bidco Ltd. (Inmarsat) Ratings Placed On CreditWatch Negative Due To Operating Risks From COVID-19

  • global satellite communications market, is expected to see a near-term deterioration in its operating performance due to the COVID-19 pandemic.
  • We assume that Inmarsat's revenue will be $50 million-$100 million weaker in 2020 than in our previous base case, and that EBITDA will be $35 million-$75 million weaker. This translates to an S&P Global Ratings-adjusted debt to EBITDA of 5.8x–6.2x in 2020, from about 5.5x in our previous base case, with further potential downside from revenue generated from distributors.
  • We are placing all our ratings on Inmarsat, including the 'B+' long-term issuer credit rating, on CreditWatch with negative implications.
  • The CreditWatch placement indicates that we will lower our ratings within the next 90 days if it becomes clear that adjusted leverage will exceed 6x in 2020, and free cash flows will remain highly negative in 2021. This could be due to a sharper-than-expected fall, and slower anticipated recovery, in usage-based aviation revenue and maritime revenue from distributors.
LONDON (S&P Global Ratings) March 25, 2020—S&P Global Ratings today took the rating actions listed above.
Inmarsat's near-term revenue will be negatively affected by the COVID-19 pandemic, with volume-based aviation revenue most exposed.   We assume that Inmarsat's revenue will be $50 million-$100 million weaker in 2020 than in our previous base case, translating to up to $50 million lower than 2019 (excluding one-off revenue from RigNet). However, our base case does not include material impact on the core maritime revenues, hence there remains a risk for greater downside in 2020, as laid out below.
A key driver of revenue weakness under our base case is a fall in revenue from in-flight connectivity (IFC; about 9% of total revenue in 2019), compared with our previous expectation of about 25% growth, due to COVID-19's effect on global travel. This is mainly reflected in 50% lower usage-based airtime revenue (about 35% of total IFC revenue in 2019). In addition, slower airline installations mean that there will be a further delay in generating previously expected airtime revenues for 2021.
We currently assume that subscription-based airtime revenue (about 23% of total IFC revenue) will remain resilient. This is based on the assumption that Inmarsat's commercial airline customers will continue to operate as going concerns. These are predominantly airlines which are large, or likely to receive government support if needed, including Emirates, Qatar Airways, Lufthansa, British Airways, and Air New Zealand. While the financial strain these airlines are experiencing means there is a risk of cancellations or delays to IFC installations (about 42% of total IFC revenue), this revenue has minimal margin for Inmarsat.
The other potential determinant of revenue weakness in 2020 will be a fall in maritime revenue (about 38% of total revenue in 2019). While maritime installation revenue is expected to decline by only $10 million to $20 million as a result of COVID-19 (corresponding to a negative 2%-4% effect on maritime revenue), we see further risk to revenue from some of Inmarsat's distributors. We understand that Inmarsat has single-digit revenue exposure to Speedcast (CCC/Negative/--; a distributor), which could be highly exposed to COVID-19 because of its exposure to Carnival cruise line, weak liquidity, and our view of its capital structure as unsustainable. Revenue from Marlink (Inmarsat's other main distributor) could also come under pressure, as it is also exposed to cruise lines. Over the longer term we expect these revenue streams will be recovered, but see a short-term risk due to potential contract renegotiation or payment issues from these distributors.
We do, however, still anticipate that usage-based revenue from global merchant shippers such as Anglo-Eastern and Maersk will remain relatively resilient. We also see a high likelihood that customer churn will reduce, linked to slower migration of customers from narrowband to broadband, and general unwillingness of customers to switch maritime connectivity provider in the current environment.
We do not envisage a material effect from the COVID-19 pandemic on Inmarsat's enterprise segment (about 9% of revenue in 2019) and government segment (about 30% of revenue).
EBITDA impact will be somewhat cushioned by cost savings, but the effect will still be negative--meaning S&P Global Ratings-adjusted leverage will come under strain.   We do not assume the negative revenue effect in 2020 will fully pass through to EBITDA, owing to various cost savings. These include a lower cost of sales, lower bonus payments, and a weaker pound sterling (a significant portion of the cost base is in pound sterling).
Nonetheless, the EBITDA effect will still be negative, likely in the $35 million-$75 million range. This is because of the company's significant degree of operating leverage (about two-thirds of the cost base is fixed), and the expectation that there will no longer be a revenue-mix shift in aviation toward high-margin airtime from low-margin installation.
EBITDA weakness means we now expect Inmarsat's adjusted leverage will come under strain in 2020. We now assume an adjusted debt to EBITDA of 5.8x–6.2x in 2020, from about 5.5x in our previous base case.
Cash impact will be further cushioned by lower capex, interest, and working capital inflow, but free cash flow will still be significantly negative.   We assume that the negative cash effect in 2020 stemming from the COVID-19 pandemic will be about half of the negative revenue effect. This is based on further offsetting from lower capital expenditure (capex), working capital inflow, and lower interest payments. We assume that capex reduction will amount to about $20 million, mainly due to lower success-based capex. We assume a working capital inflow of about $5 million-$15 million, reflecting an unwind of about 10%-15% of the negative revenue effect. Finally, we assume about $15 million lower interest payments on Inmarsat's variable rate debt (about 46% of outstanding debt), thanks to a lower U.S. dollar Libor rate following the Federal Reserve's decision to cut its policy rate to the 0%-0.25% range.
We still expect that Inmarsat's negative free cash flow will exceed $100 million in 2020. We also now expect that negative free cash flow will exceed $50 million in 2021, contrary to our previous base case of nearly breakeven free cash flow for 2021. This is mainly because of lower EBITDA than our previous base case, but also the risk that capex deferral will mean higher capex in 2021 than previously assumed.
The CreditWatch placement reflects the potential that we will lower our ratings within the next 90 days if it becomes clear that adjusted leverage will exceed 6x in 2020, and free cash flows will remain highly negative in 2021.
This could be the result of:
  • Sharper-than-expected fall and slower anticipated recovery in usage-based aviation revenue; or
  • More-negative-than-anticipated performance in the core maritime segment, including from distributors.
We could affirm the ratings if we see signs of recovery over the next three months, which would give us more confidence in Inmarsat's ability to retain credit metrics in line with the current rating.
We assess Inmarsat's liquidity as adequate. Inmarsat's liquidity is mainly supported by its undrawn $700 million revolving credit facility (RCF). We calculate Inmarsat's ratio of liquidity sources to uses at more than 2x over the 12 months from March 1, 2020, and we estimate that sources would continue to exceed uses even if EBITDA were to fall by 30%. Our liquidity assessment also factors in Inmarsat's general standing in credit markets after the buyout, its lack of a track record of liquidity risk management under new ownership, and its expected cash burn over the next couple of years.
We estimate that Inmarsat's liquidity sources over the 12 months from March 1, 2020, will include:
  • About $120 million of cash;
  • $700 million undrawn RCF maturing in 2024; and
  • Cash funds from operations (FFO) of about $370 million-$400 million.
We estimate that Inmarsat's liquidity uses over the same period will include:
  • $17.5 million of debt amortization;
  • Peak intra-year working capital outflow of about $15 million-$25 million; and
  • Reported capex of about $520 million-$540 million.

The $700 million RCF includes a springing first-lien financial maintenance covenant comprising a 9x net leverage test that will be applied if Inmarsat uses more than 40% of the RCF. In our base case for 2020-2021, we anticipate significant headroom of more than 30% above the covenant, and that drawdown on the RCF will be less than 15%.
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