France’s export credit agency, Coface, has had a busy half-year, and has become the mainstay of the satellite finance market. US operator Iridium, with its $1.8 billion fin­anc­ing of its NEXT constellation, UK operator Avanti, with its $328 million Hylas 2 financing, both used Coface-­covered debt.

These deals were, for all their history, much less challenging than the process that brought emerging markets operator O3b to the launch pad. Without Iridium’s cast of government-backed customers or Avanti’s access to public equity markets, O3b had to cast about for a number of available sources of debt and equity to fund its launch of eight satellites. It boasts a business plan based upon serving remote and rural areas without access to broadband – an untried customer base.

As a result, it sports a diverse group of equity investors – a mixture of US venture capital and technology investors, emerging markets-focused funds, and established media and technology names. The founders of the company, whose name stands for the Other 3 Billion, those without access to advanced telecommunications, raised $68 million in equity from Google, North Bridge Venture Partners, Allen & Company, Liberty Global and HSBC, from its 2007 founding through to early 2009.

The roughly 10-year debt consists of a $510 million CIRR-compliant Coface facility, with 95% commercial cover, fund­ed by HSBC, the sponsor’s financial adviser, ING, Credit Agricole and Dexia, $115 million in senior DFI loans and $145 million in mezzanine DFI loans. The four banks were all mandated lead arrangers, with ING and HSBC providing $150 million, Credit Agricole $125 million and Dexia $85 million.

The senior DFI lenders are the Development Bank of Southern Africa (DBSA, $40 million) the African Development Bank (AfDB, $25 million), Proparco ($20 million), Emerging Africa Infrastructure Fund ($12.5 million), the International Finance Corporation ($10 million) and FMO ($7.5 million). The mezzanine lenders are the IFC ($60 million), AfDB ($25 million), DEG ($20 million), FMO ($17.5 million), EAIF ($12.5 million) and HSBC Principal Investments ($10 million).

Coface was accommodating with re­spect to the amount of eligible content – essentially Thales satellites and Arianespace launch services – but items such as operating expenditure and ground equipment, to be sourced from ViaSat, could not be included. O3b’s options included, in theory, the leverage loan or bond markets, but as 2008 wore on and, given the venture’s development impact, O3b and its advisers HSBC and Portland Advisers decided to focus on the DFIs.

Probably the most important development in the deal came with the entry of Luxembourg-based SES, an experienced satellite operator, as core shareholder. SES brought existing relationships with lenders and vendors, as well as operational know-how, not to mention $75 million in equity. It provides O3b with its chief executive officer and several board members.

The DFIs were not complete newcomers to satellite finance. The IFC has participated in several satellite ventures, while the AfDB was among the participants in the $250 million Nedbank and the Industrial Development Corporation of South Africa-led financing for Intelsat/Conver­gence’s New Dawn satellite from 2008. According to Baker Yanicelli, a former banker who joined O3b as chief financial officer to assemble the financing, “each in­stitution tended to complement the other’s strengths and weaknesses. I’ve never seen a group work together so well.”

The environmental compliance issues attached to space-based ventures typically involve dealing with waste and hazardous materials, controlling the environmental impact of launch and the end of the satellites’ life. As is their practice, each lender documented, and signed, its own loan facility. All lenders had to get comfortable with the satellites’ insurance package, which is understood to come from a commercial provider on similar terms to those for other satellite operators.

The deal benefits from long-term take-or pay contracts, primarily with local telecoms operators and internet service pro­vid­ers. Indeed management had signed up customers worth $50 million per year in revenue before the arrival of SES. O3b will service markets, including those in mountainous and land-locked regions, where installing fibre-optic cable, or 3G network equipment, is too expensive. It will serve predominantly countries locat­ed near the equator, which includes, in Central America, Africa, and south and south-east Asia, a number of underserved markets.

The final challenge for the sponsors was dealing with some increases in contract prices, and foreign exchange rate fluctuations, which saw the US dollar/Euro rate move between $1.30 to as much as $1.43. Given the limits on what O3b’s debt model could support, the sponsors decided to approach additional investors for more equity. The venture would have needed to find some more equity in any case, since the founding equity contributions, which by 2010 totaled $180 million, would not have supported $770 million in debt.

New equity contributions of $230 million came in from both existing investors and new sponsors Development Bank of Southern Africa, Sofina and Satya Capital. The resulting debt/equity ratio, with subdebt counted as debt, is a more lender-friendly 65/35, and with subdebt counted as equity is nearer 55/45.

The financing has marquee appeal, bring­ing together work in emerging markets and cutting-edge technology, as well as some dependable export finance business. “I think every lender we spoke to was personally very interested in the project,” says O3b’s Yanicelli. Not all of them could do the deal, but they were all interested, and that’s rare.” It is unlikely that the O3b deal will inspire an immediate imitator, but it caps a busy 2010 for satellite finance. 

O3b Networks Limited
Status: Signed 12 November, closed 28 November
Size: $1.1 billion
Description: Broadband network based on eight medium earth orbit Ka-band satellites
Sponsors: SES (Lead shareholder), Google, North Bridge Venture Partners, Allen & Company, Liberty Global and HSBC Principal Investments, Development Bank of Southern Africa, Sofina and Satya Capital
Equity: $410 million
Debt: $510 million Coface tranche, $115 million in senior development finance institution debt, and $145 million in mezzanine DFI debt
Coface mandated lead arrangers: HSBC, ING, Credit Agricole and Dexia
DFI lenders: HSBC Principal Investments, the Development Bank of Southern Africa, the African Development Bank, DEG, Proparco, FMO, International Finance Corporation and the Emerging Africa Infrastructure Fund
Equity adviser: UBS
Debt advisers: HSBC, Portland Advisers
Borrower legal adviser: Milbank Tweed
Lender legal adviser: Allen & Overy