The Iridium '‘Team’'
Issues in Iridium
• How Valuable is Reputation and Quality of
Sponsor
• What Risks are Debt Risks versus Equity Risks
• Marketing Risks
– Pricing of Product
– Convenience of Product
• Technology and Pricing Flexibility
– What is the capacity if lower price and increase
volumes
Basic Problem of Project Finance – No History
(From Iridum Prospectus)
•
Iridium is a development stage enterprise with no operating history.. Accordingly,
all statements in this Prospectus that are not clearly historical in nature are
forward looking. Examples of such forward looking statements include the
statements concerning Iridium's operations, prospect s, markets, technical
capabilities, funding needs, financing sources, pricing, launch schedule,
commercial operations schedule, estimates of the size of addressable markets for
mobile satellite services, estimates of customer counts, the last year in which
Iridium will have negative cash flow and a net increase in year-end borrowings,
and future regulatory approvals, as well as information concerning expected
characteristics of competing systems and expected actions of third parties such as
equipment suppliers, gateway operators, service providers and roaming partners.
These forward looking statements are inherently predictive and speculative and
no assurance can be given that any of such statements will prove to be correct.
Actual results and developments may be materially different from those expressed
or implied by such statements.
Iridium Concept - Continued
•
•
Iridium Operating LLC ("Iridium") is developing and commercializing a global mobile
wireless communications system that will enable subscribers to send and receive
telephone calls virtually anywhere in the world -- all with one phone, one phone
number and one customer bill. The IRIDIUM communications system (the "IRIDIUM
System") will combine the convenience of terrestrial wireless systems with the global
reach of Iridium's satellite system.
The IRIDIUM System encompasses four components:
– the "space segment," which will include the low earth orbit satellite constellation and the
related control facilities;
– the ground stations or "gateways," which will link the satellites to terrestrial communications
systems;
– the Iridium subscriber equipment, which will provide mobile access to the satellite system and
terrestrial wireless systems; and
– the terrestrial wireless interprotocol roaming infrastructure, which will facilitate roaming
among the Iridium satellite system and multiple terrestrial wireless systems that use different
wireless protocols.
Launch of Satallites
•
•
The first launch of Iridium satellites occurred on May 5, 1997. Iridium expects to
commence commercial operations in September 1998. The satellite constellation
is being designed, assembled and delivered in orbit by Motorola, Inc. ("Motorola"),
a leading international provider of wireless communications systems, phones and
pagers, semiconductors and other electronic equipment. Motorola also is the
principal investor in Iridium, having provided investments, guarantees and
conditional to provide guarantees totaling over $1.1 billion, including its
conditional commitment to guarantee up to an additional $350 million of
borrowings under the Guaranteed Bank Facility described below.
Other strategic investors include leading wireless communications service
providers from around the world, as well as experienced satellite manufacturers
and experienced launch providers. Iridium is a wholly owned subsidiary of Iridium
LLC, a Delaware limited liability company ("Iridium LLC" or "Parent").
Forecasts for Iridium Relative to Current
Industry
Iridium Forecasts versus Total Satellite Industry Revenues
7,000,000
6,000,000
5,000,000
4,000,000
Iridium Forecast
Total Industry
33% of Industry
3,000,000
2,000,000
1,000,000
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Iridium Sources and Uses
Total
1991
1992
1993
1994
1995
1996
1997
1998
1999
Uses of Funds
Payments Under Space System Contract
Payments Under Terrestial Contract
Other Construction Expenditures
Pre-Operating Expenses
Interest Paid
Total Uses of Funds
3,380,000,000
238,000,000
409,002,000
749,162,000
362,552,300
5,138,716,300
98,500,000
18,312,750
5,483,000
122,295,750
98,500,000
18,312,750
5,483,000
122,295,750
197,000,000
18,312,750
10,966,000
226,278,750
197,000,000
18,312,750
16,729,000
232,041,750
802,000,000
26,178,000
26,436,000
854,614,000
836,000,000
164,415,000
70,730,000
18,937,500
1,090,082,500
577,000,000
64,000,000
145,158,000
177,474,000
113,170,000
1,076,802,000
574,000,000
174,000,000
435,861,000
230,444,800
1,414,305,800
Sources of Funds
Equity Financing
Guaranteed Bank Facility
Senior Bank Facility (Spread of 2.5%)
Senior Notes - A (Yield of 13%)
Senior Notes - B (Yield of 14%)
Senior Notes - C (Yield of 11.25%)
Senior Notes - D (Yield of 10.88%)
Subordinated Notes (Yield of 14.5%)
Interest on Cash Balance
Total
2,140,000,000
745,000,000
800,000,000
278,000,000
480,000,000
300,000,000
342,000,000
238,453,000
1,027,260,859
5,343,769,601
200,000,000
-
200,000,000
-
200,000,000
-
200,000,000
-
800,000,000
-
315,000,000
505,000,000
-
(230,000,000)
300,000,000
278,000,000
480,000,000
300,000,000
225,000,000
350,000,000
200,000,000
120,000,000
300,000,000
200,000,000
2,331,128
202,331,128
4,732,189
204,732,189
4,085,792
204,085,792
3,247,113
803,247,113
238,453,000
1,706,107
1,060,159,107
808,405
1,128,808,405
342,000,000
3,405,868
1,120,405,868
420,000,000
Percent Equity
Percent Guaranteed Debt
Percent Senior Debt
Percent Subordinated Debt
40%
14%
41%
4%
-
Example of Technical Obsolescence –
Iridum
• Feasibility Studies
– $880 million bridge financing
– 66 Low earth orbiting satellites
– International charges $4-7 per minute
– Handsets cost $3,000 each
Demand Expectations for Telecom
•
•
•
During the boom many people believed that Internet traffic was doubling roughly
every 100 days. This fantasy was based on statements made by WorldCom in the
1997 time frame….It led to financiers to put up trillions of dollars in capital. After
all, demand would soon catch up with whatever supply that could be built.
The specific reference to this growth rate was a statement of the chief financial
officer of Worldcom, John Sidgemore, who stated[1]:
We’re seeing growth at an unprecedented level. Our backbone doubles every 3.7
months, which means that it’s growing by a factor of 10 every year. So three years
from now, we expect our network to be 1,000 times the size it is today. . . . The big
challenge is to deploy infrastructure fast enough to accommodate such a growth
rate. We’re in a supply-constrained economy for the first time in the telecom
industry.
•
Crowe, Thomas, “The Telecom Meltdown…Looking For The Underlying Reasons”
The Iridium Concept
•
International Coverage
– 66-LEO Satellites
• Launched 72; got 67; 5-year life each
– 12 Ground Stations
•
•
•
Handset Cost = US$3,000
Call Cost = US$3.00-US$7.50 per min.
US$800 million PF
– LIBOR + 4%; 2-year Bullet
Standard and Poors and Housing Price Assumptions –
Comparison with Iriduim Assumptions
According to one story an
investor called the rating
agency Standard & Poor’s
and asked what would
happen to default rates if
real estate prices fell.
“The man at S&P couldn’t
say; its model for home
prices had no ability to
accept a negative number.
‘They were just assuming
home prices would keep
going up…’”
Projected and Actual Revenues for Iridium
9,000,000
Actual
Salomon Smith
Barney
Credit Suisse/First
Boston
Lehman Brothers
8,000,000
7,000,000
Merrill Lynch
6,000,000
CIBC Oppenheimer
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
The Iridium Concept
• Coverage?
– Does not work in your car
– Does not work in a city
• interference from buildings
– Does not work as you exit an airport
– Satellite crosses the sky in ca. 14 minutes
• handover software aboard the satellites
Defaluts by Industry
•
•
–
–
Barriers to telecommunications companies came
down
Telecommunications network became overbuilt
due to lack of demand
10
8
Telecoms
Real Estate
6
4
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
2
0
1985
Venture capitalists and stock investors fell over
each other to invest insane amounts of money in
many companies
Success of internet companies premised oh high
growth continuing
When companies failed to generate cash flow,
defaulted companies skyrocketed
Financial
1984
•
Energy
14
12
1983
In the 1990’s telecoms seemingly limitless upside
potential
18
16
1982
–
20
1981
At the end of the day you should evaluate
whether forecasts make sense in light of
fundamental economic principles.
Percent of Loans Outstanding
•
Forgetting Fundamentals of
Supply and Demand and Back of
the Envelope Analysis -Telecommunications
Default Rates by Industry
Telecommunications Meltdown
•
•
•
•
In 2001, 77 telecommunications companies sought bankruptcy
In 2000, 20 declared bankruptcy.
Two Trillion in Market Value Lost
Large bankruptcies included:
– WorldCom’s -- the single largest bankruptcy in U.S. history.
– The fiber optic network operator, Global Crossing, 4th largest
– Other leaders -- Williams Communications Group and Network Plus
•
Reasons
– Long distance price competition in pursuit of retaining market share.
– Entry into local markets blocked.
•
It's fallout from a telecoms industry in which supply has dwarfed demand.
Price of Telecommunications Lines
Real Price Index for Long-Distance Fixed Lines
130.00
120.00
110.00
100.00
90.00
80.00
70.00
60.00
Surplus Supply in Telecommunications
• .
•There was an overbuilding of telecom capacity based on the
fantasized vision of the objectives of the New Economy, which will
never be realized. For example, there was an overbuilding of
fiber-optic cable systems by a factor of at least 10. Many New
Economy companies were built based on the idea that the
telecom sector would expand perpetually by 15 to 30% per
annum.
Demand versus Supply
•
•
•
The result is overcapacity: 39 million miles of cable were laid underneath railroad
beds, natural gas lines, corn fields, and roads—enough to encircle the Earth more
than 1,500 times. Today less than 5% of the cable is "lit"; the rest remains dark,
and most is not likely to be "lit."
But reality has further asserted itself, causing additional problems in the physical
economy and revenues of the telecom sector, and ripping apart that sector's two
fundamental assumptions. The sector's CEOs thought that increased volumes of
data traffic, as opposed to voice calls, would be the savior of the telecom industry.
But data users, mostly corporations, instead of paying on the more expensive perminute basis, are paying for the data in bulk. On this basis, data transmission is not
even as profitable as old-fashioned voice calls.
Belief that voice-call traffic would rise. But alarmed industry executives report that
people are sending millions of e-mails per day, instead of spending money for
telephone calls. Some industry sources now predict that, in the future, the volume
of voice calls will fall each year.
Financial and business problems
• The telecom sector collapse is driven by two intertwined
forces.
– First, it is over-leveraged: Its companies borrowed enormous sums of
money during the 1990s, to finance a wave of mergers and some
expansion. Telecoms' total outstanding debt—still estimated at $650
billion or more—requires debt service far larger than that portion of
the sector's revenue stream available to service it; it is sucking the
telecom sector dry.
– Every company that could get its hands on the stuff proclaimed that it
was going to build a national, or super-regional fiber-optic network. In
some cases, four to six companies built fiber-optic cable networks
between or within the same major cities, far beyond prospective
levels of voice or data transmission.
Technology Risk
• Project Financing is seldom applied to new technology.
• Can take technology risk if:
– Known and proven technology is used;
– The facilities are projected to remain technologically competitive; and
– Plant/project life is longer than the funding life;
• Project financiers do not want to be ‘first’ to bank a project
with new technology.
– If an untried taechnology is incorporated into a new project, most
financiers will require extra support.
• Liquidated damage provisions after the plant is complete
• Added insurance
• Sponsor guarantee
– Covenants will be required to ensure that the borrower applies
generally accepted operating practices and obeys the applicable laws
including environmental regulations. (the "prudent operator" clause).