Maxar Technologies is focusing its near-term refinancing pitch on a new fleet of satellites that it says should catapult the cash-burning company to positive free cash flow within the next two years, according to five sources following the deal.

The new capacity should lead to a more sustainable credit profile in time. But Maxar’s capex spend will remain elevated for the next two years, so lenders must have a high degree of conviction in a successful launch, sources said.

“These satellites go live two years before the bond matures, so you have to believe that the company is going to turn things around and these satellites will be worth it,” one of the sources said.

Maxar’s aspirational refi pitch follows the failure of its large WorldView-4 satellite earlier this year. Since that event, the company has been focused on reducing its leverage through asset sales and EBITDA growth, as previously reported by Debtwire.

Led by BofA, the company is marketing USD 1.25bn of B2/B senior secured notes due 2023. A deal roadshow began early last week and continues through tomorrow (14 November), with pricing expected Friday. Price whispers are currently 9%, three of the sources said.

Proceeds from the deal would repay borrowings under the company’s USD 1.15bn revolver due 2021, as well as its USD 250m TLA-1 due 2020 and USD 250m TLA-2 due 2021. Pro forma leverage is 7x, based on USD 457m of LTM adjusted EBITDA and USD 3.22bn of total debt, according to deal documents.

If the refinancing is successful, Maxar’s capital structure will comprise of a USD 1.96bn L+ 275bps TLB due 2024, ranking pari passu with the new secured notes. The B2/B TLB is somewhat stressed, at quotes of 88.667/89.667, according to Markit. That equates to a yield to three-year call of 8.86%.

Maxar is also seeking an amendment to its credit agreement, which is contingent on successful completion of the bond offering. Through that amendment, the company will reduce committed borrowing capacity on the revolver to USD 500m and extend the facility’s maturity to 2023.

The amendment would also limit Maxar’s leverage, with a maintenance covenant set at 7.25x total leverage as of December 2019, 7.5x as of March 2020 and 7.75x as of September 2021. The covenant steps down to 7.5x in September 2022, 6.5x in March 2023 and 5.75x for each fiscal quarter thereafter.

Pro forma liquidity comprises USD 500m of borrowing capacity under the amended revolver, and USD 81m of cash.

Promising the world 

Maxar provides satellite technology, imagery and services to government and commercial customers. As of 2018, it derived just over half its revenue from space systems, with imagery the second biggest driver of sales and services coming in last.

The company is aiming to launch six WorldView Legion satellites in 2021 to grow its imagery and space systems segments. Each satellite costs roughly USD 100m, and has half the capacity of the single WorldView-4 satellite—meaning together, the six new satellites should triple the company’s imaging capacity.

As such, a successful launch would be a big step forward for Maxar, said buysiders looking at the deal. “It’s better for the company to spread its risk across several satellites rather than one satellite and these are cheaper in cost and lighter in weight,” one of the sources said.

After the satellites come online in 2021, the company expects to generate USD 300m-USD 350m in free cash flow, executives said during the company’s 3Q19 earnings call. That’s based on USD 665m in adjusted EBITDA, USD 100m-USD 150m of capex and USD 215m of interest costs.

However, elevated capex spending in the run-up to the launch will weigh on cash flow, three of the sources said. They forecasted a cash burn roughly USD 150m of cash in 2020, modeling for roughly USD 440m in adjusted EBITDA, USD 375m of capex and USD 215m of pro forma interest expense.

To boost liquidity and help offset its constrained cash flow profile over the next two years, Maxar recently entered into a sale-leaseback agreement for its Palo Alto manufacturing facility for roughly USD 291m in gross proceeds. The sale-leaseback is expected to close by the end of the year.

The company has included a special call feature in the proposed secured bonds that would allow the company to use the proceeds from the Palo Alto sale to call up to USD 300m of the proposed bonds at par. Even if it doesn’t complete the bond deal, the company still expects to use the proceeds from the Palo Alto sale to pay down its TLA-1.

But while these measures—and the maintenance covenant in the revolver—go some way to mitigating Maxar’s high leverage as it moves towards launch date, lenders are still being asked to take something of a leap of faith, sources said.

“Having the maintenance test in your back pocket is certainly reassuring to a degree, but still EBITDA growth is not a given,” one of the sources said. “I’m viewing it more on whether the satellites will be able to launch successfully.”

Buysiders agreed that the company is posed for a successful launch, according to two of the sources. “The first satellite failure was more specific to that satellite. The chances of them launching successfully are much higher this time around. They’re also not relying on just one satellite for the revenue growth, so the chances are higher,” one of the sources said.

While Maxar does not have a perfect comp, some sources evaluated the deal against fixed satellite operator Intelsat. Moody’s referred to peers such as Triumph Group, an aerospace services and part supplier, and Moog Inc, a motion and fluid control manufacturer for the aerospace and defense sectors—as comparison points.

Sources said Maxar’s bond should price between current yields on the Intelsat Jackson 8% secured notes and 8.5% unsecured notes. The B1/B USD 1.35bn 8% senior secured notes due 2024—issued through the Intelsat Jackson entity—traded today at 102.875 to yield 4.291%, in line with recent levels, far tighter than whispers on the Maxar secureds.

Pricing should come closer to the USD 2.95bn 8.5% Intelsat Jackson senior unsecured notes due 2024, they said. Those bonds traded today at 97 to yield 9.27%, down from trades yesterday at par and earlier this week at 101, according to MarketAxess.

Triumph’s Caa2/CCC USD 500m 7.75% senior unsecured notes due 2025 traded on 8 November at 102.875 to yield 6.864%, in line with recent levels. Moog’s Ba3/BB USD 300m 5.25% senior unsecured notes due 2022 last traded today at 101.75 to yield 3.527%, in line with recent levels, according to MarketAxess.

Maxar did not respond to a request for comment. BofA declined to comment.

2019 Debtwire