For investors seeking a stronger EchoStar Corp. following its merger with Dish, the team at S&P Global Ratings may have put a damper on what they’ve been wanting from the company.
A rating action taken by S&P on Friday suggests that combining Dish with EchoStar, whose primary operating subsidiary prior to the merger was Hughes, “does not solve its financial problems.” But, it does improve EchoStar’s liquidity position.
On the Dish Network acquisition, S&P Global Ratings has assigned to “CCC+” to EchoStar. as it also assigns that rating to Hughes, lowering it from “BB.”
S&P Global Ratings explains, “We believe EchoStar is vulnerable to tight financing conditions and depends on favorable business, financial, and economic conditions to meet its financial commitments in the next 2-3 years.”
In fact, S&P adds, “The company will need to raise substantial capital in the coming years to fund capital spending, wireless losses, and debt maturities.”
EchoStar on September 30, 2023 had roughly $2 billion in cash. And, Hughes provides a potential funding vehicle to refinance a portion of Dish’s upcoming maturities, carrying relatively low leverage of about 3x, S&P points out.
However, S&P adds, “Given that North American satellite broadband faces significant long-term secular pressure, we do not believe capital markets would provide incremental debt such that leverage were to rise significantly on this business, which may limit potential future issuance. Leverage of 4x-5x would yield an additional borrowing capacity of about $500 million-$1 billion.”
As such, Hughes is predicted by S&P to generate “modest” free operating cash flow (FOCF) of about $150 million-$200 million per year over the next 2-3 years to partially offset Dish’s “substantial” cash burn.
THE PENDING DISH FULL OF DEBT
As S&P Global Ratings sees it, “a massive maturity wall” is coming in 2026 for Dish.
And, it forecasts that Dish will need to raise about $1.5 billion in 2024 to address its November maturities of $2 billion and another $2.5 billion in 2025 before it can address the 2026 obligations.
What can Dish do? “We believe that Dish’s valuable unencumbered spectrum assets (totaling about $15 billion in book value) provide options to raise capital,” it notes … with a caveat. “Market appetite for incremental debt may be significantly more limited than the book value of spectrum because investors have required overcollateralization in recent spectrum-back transactions, including a 35% loan-to-value (LTV) covenant. Furthermore, secured notes will likely still be expensive as overcollateralized spectrum-backed debt issued over the past year yields more than 10%.”
As such, S&P believes Dish will need success in its nascent wireless business to lower its cost of capital and service its debt. This, S&P says, is highly uncertain.
“EchoStar has almost $10 billion of debt coming due in 2026, mostly at Dish,” S&P Global Ratings notes. “If interest rates remain at current yields, we project that Dish will not generate positive cash flow and will have difficulty accessing the capital markets in 2026 (or earlier), which could result in default. Dish’s wireless business is bleeding cash, its retail business is losing money, and its 5G network segment has yet to generate meaningful revenue.”
The company recently completed its network buildout to 70% of the U.S. population. This, S&P believes, should improve economics in Dish’s retail business as it can migrate existing customers on-network. But, S&P adds, “there will be increasing marketing and distribution costs as well as handset subsidies as Dish aims to expand its Boost retail brand by entering the postpaid market. Furthermore, Boost’s prepaid business is shrinking rapidly and has contributed to an operating loss (before depreciation and amortization) of $130 million through the first nine months of 2023.”
This leads S&P to conclude Dish’s retail business will continue to struggle to gain market share given mature wireless market conditions and competition from larger, more established wireless players with already strong brands. “This leaves little room for a new entrant with limited brand recognition,” Dish says. “We believe Dish will need to compete on price, but cable providers have penetrated the more price-sensitive segment of the market recently by aggressively bundling mobile service with high-speed internet, which could be difficult for Dish to compete against.”
Ultimately, the bigger wireless opportunity lies with the nascent 5G enterprise, internet of things, and wholesale markets, which S&P believes Dish “has yet to penetrate in a meaningful way. The company lacks meaningful contracts with large enterprise clients and a long-anticipated strategic partner that could improve line of sight into revenue growth.”
Furthermore, it notes, “the adoption of 5G private networks has been slow to gain traction across the industry. Potential enterprise customers could pause decision-making around deploying new communications architecture in an uncertain economic environment, which could limit potential benefits over the next year. Management targeted a 25% market share that management indicated in May 2022 could be a $30 billion overall domestic market by 2025. Clearly, the addressable market will be much smaller by 2025, which we believe will be a pivotal year for Dish as it will need to progress toward significant earnings growth potential to address 2026 maturities.”
S&P explains the negative outlook reflects large FOCF deficits, execution risk, uncertainty of EchoStar’s long-term wireless earnings growth and significant refinancing requirements, which will be exacerbated by elevated interest rates.
