Junk Market Closed, Globalstar Opts For Bank Debt

High yield satellite company Globalstar last week arranged a $500 million financing package, but due to a poor financial position it was unable to utilize its favored financing method - the high yield bond market - opting instead for a credit line from Bank of America.

Late last year, chairman and chief executive Bernard Schwartz said that junk bonds would be his first choice to finish the funding of the company's $3.5 billion business plan to finance 52 satellites it intends to launch by the end of 1999 (HYR 12/14/99). Even at that time, however, institutional investors noted that it would be tough for the company to float an offering due to changing technology and execution risk.

A company spokeswoman said that last year the high yield market was indeed Globalstar's first choice, but the company now had to do what was "most prudent."

Analysts put it more bluntly: The company would find it nearly impossible to issue new debt in today's market. Given the state of the market, and more importantly, the state of the company, Globalstar would need to offer a 20% yield to entice even the riskiest investors.

The company's debt is rated Caa1 by Moody's Investors Service; the bank debt is rated Ba3.

Analysts said last week that the woes of other issuers in the satellite industry, namely Iridium, have made it all the tougher in the interim. Iridium is now trading at about 4,000 basis points over Treasurys. Globalstar is at a comparatively safe 1,800 basis points over the curve.

To be sure, the news wasn't all bad last week, as the bid for Globalstar bonds improved slightly after the company announced its $500 million line of credit, which is scheduled to close next month. The news firmed up Iridium's paper as well, although there

wasn't much trading in either name.

The company said in a prepared statement that the new financing puts the company in line with a September launch date for satellite communication service with 32 satellites. By the end of December, a total of 48 satellites plus four spares will be in use.

The system is designed to provide digital service to a wide spectrum of users, including those who cannot use cellular service because they travel outside the territories or are residents of inadequately covered areas.

Operational problems have plagued the company since a rocket carrying 12 satellites crashed in September. The accident increased costs by $250 million, forcing the entire industry, albeit small, to trade down in the secondary market.

And the other risk associated with the industry as a whole is its vulnerability to high-tech developments. A new technological advance could potentially render obsolete any part of the satellite systems, investors said. Another potential downside noted by some buy-siders is the fact that debt holders are not compensated for the risk in such deals.

An equity investor risks his assets and has the potential to see the investment go through the roof when a high-tech concern hits it big, whereas the debt holder will realize a respectable 10% coupon. That helps to explain why, though debt is safer on the capital structure, some investors maintain that high tech bonds aren't worth it.

On the plus side for Globalstar is the fact that CEO Schwartz is well-liked by Wall Street. Investors said that if anybody can make the company work, he can.