The ratings are on CreditWatch pending the outcome of Hughes' merger with EchoStar Communications Corp., which is uncertain at this time. Standard & Poor's has indicated that the corporate credit rating for either the combined EchoStar/Hughes/PanAmSat Corp. or EchoStar/PanAmSat will be either a BB- or B+.
"The downgrade was based on a more thorough determination of the credit quality of Hughes on a stand-alone basis, in light of the new financing, should the merger not be approved," says Standard & Poor's analyst Greg Zappin. Hughes recently increased the size of its revolving credit facility to $1.235 billion from $750 million, and is currently syndicating a $577 million term loan. Drawdowns under the new bank credit facilities will refinance Hughes' debt at its Latin American subsidiaries, and fund the company's operations during 2002. As of Dec. 31, 2001, Hughes' consolidated debt was about $2.6 billion.
The new facility is secured by the assets and capital stock of two of Hughes' subsidiaries: DirectTV Enterprises Inc. and Hughes Network Systems Inc. Both subsidiaries provide upstream guarantees. Repayment of the facilities is expected to come from the completion of the merger, or from proceeds from the sale of Hughes' 81%-owned subsidiary PanAmSat to EchoStar should the merger be rejected. The maturity date of the facility is the earlier of Dec. 5, 2002, or completion of the merger. The facility ranks parri passu with a $500 million loan recently arranged from General Motors Acceptance Corp., a subsidiary of General Motors Corp.
The $1.825 billion facility is rated one notched higher than Hughes' corporate credit rating, reflecting Standard & Poor's belief that bank lenders would receive full recovery in a distressed scenario. Assuming the entire $2.3 billion in bank loans are drawn, debt per subscriber is very low at less than $300 (based on about 9.1 million subscribers, excluding National Rural Telecommunications Cooperative subscribers and DirectTV Latin America customers, which are not part of the collateral package).
Management estimates cash needs during 2002 in the $1.8 billion to $2.0 billion range, and has projected EBIDTA, excluding PanAmSat, of about $200 million. If the merger does not receive regulatory approval, EchoStar is required to purchase PanAmSat for $2.7 billion and pay a $600 million break-up fee to Hughes. These proceeds will be used to pay down all the company's outstanding debt, with excess cash expected to be available for cash needs in 2003, even if operating performance falls short of expectations. Hughes' outlook on a stand-alone basis would be determined at that time, in conjunction with a review of business and competitive conditions, execution during 2002, capital spending levels in 2003, and capital structure considerations. From Standard & Poor's RatingsDirect