The debt of Intelsat and PanAmSat dropped on the announcement of a merger between the two companies. Interlsat's $3.2 billion acquisition of PanAmSat will be financed by potentially amending and/or restating the two companies' debt and adding new bonds, filings with the Securities and Exchange Commission state. Deutsche Bank, Citigroup, Credit Suisse First Boston, and Lehman Brothers all banks that led the companies' most recent transactions will lead the financing.
PanAmSat's 9% '14 bonds dropped to 105.25 from 110.5, while its 6.875% '28 bonds dropped to 93 from 96.625. Intelsat's 5.25% '08 bonds fell two points to 92, while its 6.5% '13 bonds slid to 78.25 from 83. The announcement also took half a point off PanAmSat's loan. The debt was trading at 101 following the announcement, but had regained 1/4 of a point by press time.
One trader noted that a downgrade by the rating agencies would cause more volatility in PanAmSat's loans. Moody's Investors Service changed PanAmSat's outlook to developing from stable; it changed its outlook on Intelsat to developing from negative. Fitch Ratings has Intelsat on rating watch negative.
John Puchalla, an analyst at Moody's, said PanAmSat's debt could be downgraded by three notches if the merger goes ahead. The deal is pending regulatory approval. The downgrade would result from the risks associated with being part of a more highly leveraged company. "Since it would be part of a bigger organization, cash flows of PanAmSat could be used elsewhere in the organization, weakening PanAmSat's debt protection. The amount of cash supporting existing debt holders would be less, increasing the risk of default," he said. He estimated the total debt of the combined entity could be between $8 billion and $11 billion. Calls to Intelsat and PanAmSat were not returned