Eutelsat - The Bond Constellation - Positioning

All,

Please find our significantly updated analysis of Eutelsat here.

Every now and then a company sees its cash-cow business decline and has to bet on the new star. Lucky for satellite operators, those new stars are not all that different from the old ones, at least in principle. Eutelsat, however, is the most exposed to the decline in its cash-cow business and it holds the only operational LEO constellation outside the US. So this name has more dynamic than most other satellite players and apart from GEOs and LEOs offers an entire constellation of bonds to express our views. We’ve settled for the simplest one.

Investment Rationale:
- We are taking off our 2% of NAV short in the '27s and instead are going long 5% of NAV in the high coupon '29s. We don't quite think we will be making the 15% yield to maturity as we could be headed for an LME next year, but after debating various trades in this capital structure we like best its simplicity and risk-weighted return. A Sauvegarde is unlikely and an LME should preserve, if not enhance the coupon. Absent either, it's YTM. The Legacy business won't be falling apart quite as quickly as overall communication enjoys a rising tide. OneWeb will become valuable and by next year we will see more of it.
- Our base case is that in 2026 the company will be looking to address all bonds at the same time with some sort of A&E, possibly aided by an LME. Only addressing the '27 seems like a jump too short.

Structural Idiosyncrasies:
- Having “bought" OneWeb in a share-deal, Eutelsat Communications (Comm.) holds Eutelsat S.A. (ESA) and OneWeb largely separately, safe for a 23% share that ESA holds in OneWeb.
- The Lion share of creditors sits unsecured at ESA - the slowly sinking ship. To them, OneWeb is outside the restricted group (RG)(substantially ESA) and their negative covenants do not apply to OneWeb.
- ESA is subsidising the CapEx and losses involved in ramping up the company’s new star OneWeb, so “investments” are leaving the RG in return for building up only an intercompany loan.
- This leaves ESA creditors vulnerable to layering by new loans or an up-tiering on the OneWeb asset.

The GEO Legacy:
- In Q225 management began to write down its GEO constellation and opened the prospect to significantly lower ongoing CapEx - an indication (if we needed it) that the business is in decline. Moreover, the aggregate backlog of the business declined as a result of ESA falling faster than OneWeb - the second-hottest satellite constellation in space - can ramp up.
- ESA makes half its money from Video (still), which is declining at a pace of -6% p.a. and accelerating. This makes Eutelsat the most exposed of all satellite operators. Video is migrating from Broadcast to On Demand and GEO constellations are not built for that.
- However, the overall increase in communication in the world is driving demand in its other segments, for now at least fully replacing the falling Video demand. We therefore see the business surviving for some time until perhaps large LEO constellations are able to guarantee service levels. The decline of the GEO constellation should not yet be terminal in a year’s time.

OneWeb:
- The constellation is delayed and increasingly so. How costly that is in terms of foregone opportunity is documented in the half-billion write-down of the company’s goodwill, which stemmed from the acquisition.
- OneWeb is one day supposed to generate revenues of €2bn p.a., but until then it will consume approx. €2bn in investments, courtesy of ESA and its creditors.
- Management also disclosed that there would be a follow-on CapEx requirement, which it did not specify, but which we project at approx. €1bn.
- The full operation of OneWeb lies outside of our modelling horizon. We are expecting this in 2031.

IRIS2:
- Too little is known about this project today to credibly model anything. About the only comment we can make here is that it will require yet further €2bn CapEx before it can even begin service. We do not know at present where the company intends to raise the cash, but the elephant in the room is trumpeting “from somewhere closer to the assets than current creditors”.

Passive Ground Infrastructure:
- The way OneWeb is built, it requires expansive ground infrastructure. Signals are sent to space and immediately sent down to earth again, not transmitted between satellites as the new generation of Starlink satellites aims to do.
- Eutelsat are selling 80% of their combined ground infrastructure to EQT, who are looking to share it with other satellite operators. This move makes sense for both sides within the context of consolidation in the sector and lower CapEx all around.
- Eutelsat are expecting a net cash inflow of €500m from the sale later this year.


Here to discuss this name with you,


Wolfgang

E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk