Eutelsat - The Sky Is Falling Slowly - Positioning

Dear All,

Please find our initiation here.

"Chasing too many rabbits at the same time": Eutelsat is facing the perfect storm of declines in half of its revenues, a large capex bill for the medium term to fund its pivot to the faster growing LEO satellite segment, facing accelerating competition and the need to refinance its large debt load at higher rates all at the same time. The company is burning cash and is reliant on existing liquidity and external stakeholders to give it time to become free cash flow positive. However given the large liquidity runway, there is no near-term catalyst for a stressed refinancing until at least Q1 2026.

Investment Considerations

- We are taking a 2% NAV short position in the 2.25% senior notes due 2027 at 88% as the near-term operating momentum will get worse before it gets better with credit KPIs going in the wrong direction.

-Eutelsat is in the middle of a transition in its business model and needs to keep investing in its second-generation LEO satellite constellation (OneWeb) and cannot afford to cut capex till at least 2030 and hence is expected to continue to burn cash going forward.

-The legacy business of Eutelsat is generating free cash flow however the company invest in capex outside the restricted group which is a not positive for the existing bond holders.

- Risk to our position primarily comes from a major equity injection or rights issue. We don’t think this is a H125 event, but take comfort in the mere 12 points upside the bonds would theoretically have in that scenario.

Too many unknowns not priced into the existing trading levels of the senior notes

-With 50% of its revenues declining due to a structural shift in consumer demand & technology in the high single digits, the company needs to grow the other half of its business (focused on the faster growing connectivity market) to compensate for the decline but…

-Enter Starlink: The elephant in the room is the behaviour of the no. 1 player in the LEO segment of the satellite space which is adding capacity to the market and has the scale to buy market share and survive a price war with Eutelsat.

-Upcoming debt maturities: €2.3 billion of debt is maturing over the next three years which needs to be refinanced however given the declining fundamentals at that point (due to the above) the new debt holders (bonds or loan) will require a higher rate of return.

-Post 2026, the debt maturities come due every year (from 2027 to 2029) and the longer Eutelsat takes for a full refinancing, the more challenging the terms and conditions will be.

-The appetite of bank lenders and export credit agencies for increasing their exposure is an unknown and we suspect will be driven by political rather than commercial factors.

- However given the multiple liquidity drivers available to the company it is early to judge whether the company will enter a procédure de sauvegarde to restructure its debt.

Does Eutelsat need to exist

-As players in the satellite services industry provide vital communication services to government agencies (defence & intelligence related), Eutelsat has a reason to exist as a European champion to provide an alternative to the US based competitor Starlink – there should operating fundamentals deteriorate further, we can expect the main shareholders (UK & French linked shareholders & institutions) to support the business in the form of:

-backstopping a rights issue when its liquidity position becomes worse

-Getting government linked financial institutions (banks and export credit agencies) to assist with any refinancing process.

We believe the above scenario will only play out in the worst-case scenario as government stakeholders will be a lender of last resort. However, by that time the senior notes will have already priced that in leading to the fruition of our short thesis.