Fitch Upgrades Intelsat's IDR To 'B' On PanAmSat Acquisition

Business Wire, June 15, 2006

NEW YORK -- Fitch has upgraded the Issuer Default Rating (IDR) for Intelsat to 'B' from 'B-' pro forma for its pending acquisition of PanAmSat. The ratings are also removed from Rating Watch Negative, where they had originally been placed on Aug. 30, 2005.

The Rating Outlook is Stable. Fitch has also initiated ratings for all of the PanAmSat entities assuming that the pending acquisition and associated debt issuances close under the announced terms. Approximately $12 billion of debt is covered by these actions.

On Aug. 29, 2005, Intelsat announced that it had signed a definitive agreement to acquire PanAmSat for $3.2 billion, or $25 per share of PanAmSat common stock, plus the assumption of $3.2 billion of debt. Pricing for the transaction is approximately 10 times (x) the latest 12 months (LTM) ended March 31, 2006 operating EBITDA. The transaction, which has been cleared by the Department of Justice, is subject to obtaining regulatory approval from the FCC.

The ratings reflect the combined company's position as the largest fixed satellite services (FSS) provider, its contracted and diverse revenue stream, and stable free cash flow generation from a relatively sound customer base. The ratings are also based on Intelsat's significant leverage on a pro forma basis for the acquisition, competition from lower cost terrestrial fiber optic cable, and the capital intensive nature of its business.

The combination of Intelsat and PanAmSat would create the largest satellite communications company in the world with a global fleet of 50 satellites and combined annual revenues of over $2 billion. It will supply video, data and voice connectivity in over 200 countries for about 1,800 customers, including some of the world's leading media and communications companies, multinational corporations, Internet service providers and government/military organizations. Its $8.3 billion revenue backlog is diversified geographically and by service sector, providing reasonable revenue stability. With operating EBITDA margins of about 70%, the combined company is expected to generate positive free cash flow even with a significant increase in pro forma interest expense.

However, a significant portion of Intelsat's revenue is still expected to come from traditional telephone carriage. This segment has been experiencing a decline in revenue due to both the overcapacity in the satellite industry and to a loss of customers to lower cost terrestrial fiber optic cable. Intelsat plans to address this issue by expanding its business in point-to-multipoint services such as video and growing its managed solutions business. The satellite business is also highly capital intensive, and the combined company has spent over $3.4 billion on 15 satellites launched since 2001 in connection with its satellite renewal and replacement cycle. Although Intelsat has announced plans to launch the IA-9 satellite in 2007 instead of 2010, and PanAmSat has plans to launch four additional satellites in the next two years, the combined company expects to achieve capital expenditure savings of $400 million from 2006 to 2011 as it rationalizes operations. The combined company could generate strong free cash flow as it gradually enters a post-satellite renewal phase. It should be noted however, that the combined company self-insures most of its in-orbit satellites, and any satellite failure could affect revenue, capital expenditures, and cash flow.

Fitch believes that a shareholder-friendly transaction similar to Intelsat's special dividend transaction in 2005 would pose a significant risk to bondholders. The proposed restricted payments test at PanAmSat and Intelsat provides the potential for such transactions as leverage is reduced from current levels, and investors may want to take this into account. In its 2005 10-K filing, Intelsat has stated that it does not expect to issue a cash dividend to its shareholders until the completion of the PanAmSat acquisition, and for a period of at least 12 months following such completion, absent an initial public offering of equity securities, and assuming that the PanAmSat acquisition is completed during the second or third quarter of 2006. This commitment somewhat alleviates our concern at least in the short term.

Pro forma for the transaction, Intelsat's leverage would have been approximately 7.7x for the LTM ended March 31, 2006, as defined by total debt to combined adjusted EBITDA excluding any operating synergies, and approximately 8x on an operating EBITDA basis. The combined company is expected to have adequate liquidity of around $800 million, consisting of undrawn revolvers at Sub Holdco and PanAmSat Opco (as defined below), and cash on hand. Intelsat should have adequate financial flexibility to meet its near-term capital requirements and debt service obligations.

Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of default. The RRs and notching in the debt structure reflect Fitch's recovery expectations under a scenario in which distressed enterprise value is allocated to the various debt classes. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at www.fitchratings.com/recovery.>