A wave of corporate bond activity is drawing a mixed response from connectivity providers, amid a series of moves in the US by the Federal Reserve Bank to jolt a sluggish economy.

The telecom market is responding in the early stages of the trend with a couple issuances of investment-grade bonds in a market with some blue chips. In satellite, however, the outlook is much more muted due in part to the large amount of debt in the sector and a spurt of bankruptcies, presenting investors with a rockier picture though some are ferreting out opportunity.

While the securitisation market is seeing issuances from the connectivity industry even amid the disorder due to the COVID-19 crisis, satellite is focusing on other priorities, such as the temporary boost from the C-band auction, the expectation of M&A and the onset of inertia as these situations play out.

On 26 May, Intelsat (NYSE:I) and SES (EPA:SESG) notified the FCC that they will participate in the agency’s US$9.7bn accelerated C-band spectrum clearing process, though they estimate that they will each spend US$1.6bn on new satellites. Intelsat is eligible to receive US$4.86bn of the accelerated clearing funds, with SES in line for US$3.97bn. Eutelsat (EPA:ETL), Star One and Telesat would receive lesser amounts, with 29 May the deadline for all operators to say if they will participate in the plan.

Record US bond activity

US companies through late May have issued a record US$1.2tn of bonds this year, a 78% increase over the comparable period of 2019, analytics provider Dealogic said. Companies are taking advantage of the situation after the Fed in March said it would buy corporate bonds. It plans to purchase investment grade and high yield debt, including exchange-traded funds.

And the wave is popping up in connectivity as the investment-grade market remains open to quality issuers, such as Mexico-based telecoms giant America Movil (NYSE:AMX). It locked in a US$1bn, 10-year bond in early May. With a coupon of 2.875%, the company achieved its lowest rate ever for a deal with high-level proceeds, as it took advantage of plummeting yields in the US Treasury market.

In a twist, telecoms provider Verizon Communications (NYSE:VZ) debuted in the Canadian dollar-denominated market – sometimes dubbed the Maple Bond Market – as the company priced C$1.3bn (US$944m) in mid-May. It also sold €2.15bn (US$2.38bn) of notes due in 2033 and 2040 earlier the same month. In March, the company sold US$3.5bn in the US market.

And the trend is reaching downstream, as tower operator Crown Castle (NYSE:CCI) raised about US$1.2bn in a late March offering of 3.3% senior notes due 2030 and 4.15% senior notes due 2050. Rival American Tower (NYSE:AMT) got a boost in April, as Fitch Ratings upgraded its long-term default rating and its senior unsecured notes and credit facilities ratings to BBB+ from BBB.

The situation is further solidified as the Fed has provided a lending backstop, promising to help investment-grade companies issue debt if they become otherwise unable, though there has been no update. The record flood of bonds is finding willing buyers in the US and from overseas in part because of negative-yielding European and Japanese sovereign and corporate debt, analysts say.

Yet US corporate paper is not a cure-all to an ailing economy as regulators are concerned about the growth of BBB bonds – the lowest-quality investment-grade notes. In 2019 they made up about half the investment-grade market compared with 17% in 2001, according to researcher Evergreen Gavekal. This has prompted a warning from the Fed that a widespread downgrade of BBB bonds during market stress could increase market illiquidity and downward price pressure, accelerating an economic downturn.

Different situation in satellite

A different picture emerges in satellite connectivity, where some struggling companies are desperate for cash after years of issuing debt to fund growth, including inflight connectivity provider Gogo (NASDAQ:GOGO), Intelsat and satcoms specialist Speedcast International.

Gogo disclosed in a late-May filing that Mudrick Capital Management bought two million convertible senior notes with a 6% coupon due 15 May 2022, bringing its total notes count to 10.1 million.

Gogo is part of a larger trend, as nearly 60% of all money raised in equity capital markets in April was through convertible-bond sales, according to Dealogic. That is the highest percentage since early 2008 amid the expectation of more convertible deals through the rest of 2020.

CEO Oakleigh Thorne had said weeks earlier during the company’s Q1 2020 earnings call that it is not pursuing financing, adding that it would “entertain conversations” so that it would “understand the realm of the possible”. M&A might be in view as EVP Jon Cobin told Connectivity Business in April that the company brings “significant value to that landscape through its leading market position and capabilities”.

The company, which has a 9.4x net leverage, has applied for an US$81m grant and a US$150m loan under the CARES Act, the US law meant to address the economic fallout of the COVID-19 pandemic. Gogo also furloughed about 60% of its workforce – some 600 employees – and reduced the compensation for most others.

These activities show that Gogo took a “rough tumble” as it sees “some green shoots through the field of red,” Raymond James analyst Ric Prentiss said in a note.

Its priorities include maintaining liquidity of about US$50m to run the business, paying interest to debt holders, including a US$45.7m semi-annual cash payment in early May, and preserving the strategic value of its business and commercial aviation segments.

As for Intelsat and Speedcast, Moody’s in recent months downgraded the ratings for them against the backdrop of their bankruptcy filings.

Intelsat is facing a near-US$15bn debt mountain amid commitments for US$1bn in debtor-in-possession financing as it points to accelerated payments as part of the FCC’s roadmap for reallocating parts of C-band spectrum for terrestrial 5G connectivity. And Speedcast recently announced that it has received a commitment for US$90m in debtor-in-possession financing from the holders of its outstanding term loan. The company is reportedly negotiating with lenders as it has a US$591.4m term loan that is set to mature in 2025.