Telesat's credit rating downgraded at S&P amid revenue losses

S&P Global Ratings downgraded Telesat Canada's credit rating to 'CCC-' from 'CCC+' with a negative outlook, citing a 23% revenue decline in Q1 2025 due to erosion in its legacy GEO satellite business and customer losses. The agency also highlighted refinancing risks for Telesat's $2.4 billion in debt due in December 2026, noting limited capital market access and potential for a distressed exchange within 6-12 months. While Telesat focuses on its LEO satellite program with a C$1.1 billion order backlog and secured government funding, intense competition and declining EBITDA are expected to pressure the company's capital structure and debt servicing capabilities.

Analysis

S&P Global Ratings has downgraded Telesat Canada's credit rating to 'CCC-' from 'CCC+', assigning a negative outlook and assessing its liquidity as 'less than adequate,' primarily due to ongoing revenue erosion and customer losses in its legacy geosynchronous earth orbit (GEO) satellite business. This decline is underscored by a 23% year-over-year revenue fall in the first quarter of 2025, attributed to lower renewal rates with key North American direct-to-home television customers, reduced demand from other clients, and decreased equipment sales to Canadian government entities, with the pace of this revenue decline accelerating since Q4 2023. S&P Global Ratings highlights significant refinancing risk concerning Telesat's $1.9 billion senior secured term loan and $500 million senior secured notes, both maturing in December 2026, expressing high uncertainty about the company's ability to refinance this debt at par due to persistent earnings weakness and limited capital market access, thereby increasing the risk of a distressed exchange within the next 6-12 months. The company's EBITDA is anticipated to decrease significantly in 2025, leading to a projected tight EBITDA interest coverage ratio of approximately 0.7x. Despite these challenges, Telesat is focusing on its low-earth orbit (LEO) satellite constellation, having secured C$1.1 billion in total order backlog and $2.54 billion in funding from Canadian governments; however, this segment faces intense competition from players like Starlink, and S&P views Telesat's overall capital structure as unsustainable, potentially leading to debt restructuring.

Key Decisions for Investors

• Given Telesat's 'CCC-' credit rating and S&P's negative outlook, investors should closely scrutinize upcoming cash flow reports and liquidity updates for any signs of further deterioration.
• The significant refinancing risk associated with the $2.4 billion in debt due December 2026 warrants careful monitoring for any announcements regarding debt restructuring, as a distressed exchange is considered increasingly likely by S&P within the next 6-12 months.
• While the LEO satellite program holds future potential with a C$1.1 billion backlog and government funding, its ability to meaningfully offset severe legacy GEO business declines amid intense competition and execution risks must be critically assessed before ascribing significant near-term value.
• Investors should exercise extreme caution due to accelerating revenue declines, projected weak EBITDA interest coverage around 0.7x for 2025, and the high probability of further credit deterioration or default-like events as highlighted by the rating agency.