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8. Long-Term Debt and Capital Lease Obligations
6 1/2% Senior Secured Notes due 2019
On June 1, 2011, Hughes Satellite Systems Corporation (“HSS”), our wholly-owned subsidiary formerly known as EH Holding Corporation, issued $1.1 billion aggregate principal amount of its 6 1/2% Senior Secured Notes (the “Senior Secured Notes”) at an issue price of 100.0%, pursuant to a Secured Indenture dated June 1, 2011 (the “Secured Indenture”). The Senior Secured Notes mature on June 15, 2019. Interest accrues at an annual rate of 6 1/2% and is payable semi-annually in cash, in arrears on June 15 and December 15 of each year, commencing on December 15, 2011.
The Senior Secured Notes are redeemable, in whole or in part, at any time at a redemption price equal to 100% of the principal amount thereof plus a “make-whole” premium, as defined in the Secured Indenture, together with accrued and unpaid interest, if any, to the date of redemption. Prior to June 15, 2014, HSS may also redeem up to 35% of the aggregate principal amount of the Senior Secured Notes at a redemption price equal to 106.500% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds from certain equity offerings or capital contributions. In addition, prior to June 15, 2015, HSS may redeem up to 10% of the outstanding Senior Secured Notes per year at a redemption price equal to 103% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of redemption.
The Senior Secured Notes are:
· general secured obligations of HSS;
· secured by a first priority security interest in substantially all of the assets of HSS and certain of its subsidiaries, subject to certain exceptions and Permitted Liens (as defined in the Secured Indenture);
· effectively junior to HSS’s obligations that are secured by assets that are not part of the Collateral (as defined in the Secured Indenture) that is securing the Senior Secured Notes, in each case to the extent of the value of the Collateral securing such obligations;
· effectively senior to HSS’s existing and future unsecured obligations to the extent of the value of the Collateral securing the Senior Secured Notes, after giving effect to Permitted Liens;
· senior in right of payment to all existing and future obligations of HSS that are expressly subordinated to the Senior Secured Notes;
· structurally junior to any existing and future obligations of any non-Guarantor Subsidiaries (as defined in the Secured Indenture); and
· unconditionally guaranteed, jointly and severally, on a general senior secured basis by each Guarantor (as defined in the Secured Indenture).
Subject to certain exceptions, the Secured Indenture contains restrictive covenants that, among other things, impose limitations on the ability of HSS and, in certain instances, the ability of its Restricted Subsidiaries (as defined in the Secured Indenture), to:
· pay dividends or make distributions on HSS’s capital stock or repurchase HSS’s capital stock;
· incur additional debt;
· make certain investments;
· create liens or enter into sale and leaseback transactions;
· merge or consolidate with another company;
· transfer and sell assets;
· enter into transactions with affiliates; and
· allow to exist certain restrictions on the ability of certain subsidiaries of HSS to pay dividends, make distributions, make other payments, or transfer assets to us.
In the event of a change of control, as defined in the Secured Indenture, HSS would be required to make an offer to repurchase all or any part of a holder’s Senior Secured Notes at a purchase price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest thereon to the date of repurchase.
7 5/8% Senior Notes due 2021
On June 1, 2011, HSS issued $900 million aggregate principal amount of its 7 5/8% Senior Notes (the “Senior Notes”) at an issue price of 100.0%, pursuant to an Unsecured Indenture dated June 1, 2011 (the “Unsecured Indenture”). The Senior Notes mature on June 15, 2021. Interest accrues at an annual rate of 7 5/8% and is payable semi-annually in cash, in arrears on June 15 and December 15 of each year, commencing on December 15, 2011.
The Senior Notes are redeemable, in whole or in part, at any time at a redemption price equal to 100.0% of the principal amount plus a “make-whole” premium, as defined in the Unsecured Indenture, together with accrued and unpaid interest, if any, to the date of redemption. Prior to June 15, 2014, HSS may also redeem up to 35% of the aggregate principal amount of the Senior Notes at a redemption price equal to 107.625% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds from certain equity offerings or capital contributions.
The Senior Notes are:
· general unsecured obligations of HSS;
· effectively junior to HSS’s obligations that are secured to the extent of the value of the collateral securing such obligations;
· senior in right of payment to all existing and future obligations of HSS that are expressly subordinated to the Senior Notes;
· structurally junior to any existing and future obligations of any non-Guarantor Subsidiaries (as defined in the Unsecured Indenture); and
· unconditionally guaranteed, jointly and severally, on a general senior basis by each Guarantor (as defined in the Unsecured Indenture).
Subject to certain exceptions, the Unsecured Indenture contains restrictive covenants that, among other things, impose limitations on the ability of HSS and, in certain instances, the ability of its Restricted Subsidiaries (as defined in the Unsecured Indenture), to:
· pay dividends or make distributions on HSS’s capital stock or repurchase HSS’s capital stock;
· incur additional debt;
· make certain investments;
· create liens or enter into sale and leaseback transactions;
· merge or consolidate with another company;
· transfer and sell assets;
· enter into transactions with affiliates; and
· allow to exist certain restrictions on the ability of certain subsidiaries to pay dividends, make distributions, make other payments, or transfer assets to us.
In the event of a change of control, as defined in the Unsecured Indenture, HSS would be required to make an offer to repurchase all or any part of a holder’s Senior Notes at a purchase price equal to 101% of the aggregate principal amount thereof, together with accrued and unpaid interest thereon to the date of repurchase.
Fair Value of our Long-Term Debt
The following table summarizes the carrying and fair values of our debt facilities as of September 30, 2011 and December 31, 2010:
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|
|
As of |
|
|
|
|
September 30, 2011 |
|
December 31, 2010 |
|
|
|
|
Carrying |
|
|
|
Carrying |
|
|
|
|
|
|
Value |
|
Fair Value |
|
Value |
|
Fair Value |
|
|
|
|
(In thousands) |
|
|
6 1/2% Senior Secured Notes due 2019 |
|
$ |
1,100,000 |
|
$ |
1,072,500 |
|
$ |
— |
|
$ |
— |
|
|
7 5/8% Senior Notes due 2021 |
|
900,000 |
|
873,000 |
|
— |
|
— |
|
|
Mortgages and other notes payable |
|
6,895 |
|
6,895 |
|
6,535 |
|
6,535 |
|
|
Subtotal |
|
2,006,895 |
|
$ |
1,952,395 |
|
6,535 |
|
$ |
6,535 |
|
|
Capital lease obligations (1) |
|
390,744 |
|
NA |
|
406,350 |
|
NA |
|
|
Total long-term debt and capital lease obligations (including current portion) |
|
$ |
2,397,639 |
|
|
|
$ |
412,885 |
|
|
|
(1) Disclosure regarding fair value of capital leases is not required.
Capital Lease Obligations
As of September 30, 2011 and December 31, 2010, we had $567 million and $535 million, respectively, capitalized for the estimated fair value of satellites acquired under capital leases included in “Property and equipment, net,” with related accumulated depreciation of $289 million and $268 million, respectively.
In our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), we recognized depreciation expense on satellites acquired under capital lease agreements as follows:
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|
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For the Three Months |
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For the Nine Months |
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|
|
|
Ended September 30, |
|
Ended September 30, |
|
|
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
|
(In thousands) |
|
|
Depreciation expense - capital leases |
|
$ |
7,222 |
|
$ |
6,444 |
|
$ |
21,265 |
|
$ |
21,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following satellites are accounted for as capital leases and depreciated over the terms of the respective satellite service agreements.
AMC-15. AMC-15 commenced commercial operation during January 2005. This lease is renewable by us on a year-to-year basis following the initial ten-year term, and provides us with certain rights to lease capacity on replacement satellites. During 2011, AMC-15 experienced solar-power anomalies, which caused a power loss that reduced its capacity. Pursuant to the satellite services agreement, we are negotiating a reduction of our monthly recurring payment, which could impact the carrying value of the satellite and the related capital lease obligation.
AMC-16. AMC-16 commenced commercial operation during February 2005. This lease is renewable by us on a year-to-year basis following the initial ten-year term, and provides us with certain rights to lease capacity on replacement satellites. Effective in March and July 2010, the monthly recurring payment was reduced as a result of a March 2010 anomaly and as a result our capital lease obligation and the corresponding asset value was lowered by a total of $39 million. In addition, beginning in May 2011, the monthly recurring payment was reduced again due to the March 2010 anomaly and as a result our capital lease obligation was lowered by approximately $7 million and a gain was recorded in “Other, net” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Nimiq 5. Nimiq 5 was launched in September 2009 and commenced commercial operation at the 72.7 degree orbital location during October 2009, where it provides additional high-powered capacity to our satellite fleet. See Note 13 for further discussion.
QuetzSat-1. QuetzSat-1 was launched in September 2011. This lease is renewable by us on a year-to-year basis following the initial ten-year term and provides us with certain rights to lease capacity on replacement satellites. See Note 13 for further discussion.
Future minimum lease payments under these capital lease obligations, together with the present value of the net minimum lease payments as of September 30, 2011 are as follows (in thousands):
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For the Years Ended December 31, |
|
|
|
|
2011 (three months remaining) |
|
$ |
30,971 |
|
|
2012 |
|
123,331 |
|
|
2013 |
|
121,674 |
|
|
2014 |
|
115,925 |
|
|
2015 |
|
50,200 |
|
|
Thereafter |
|
429,000 |
|
|
Total minimum lease payments |
|
871,101 |
|
|
Less: Amount representing lease of the orbital location and estimated executory costs (primarily insurance and maintenance) including profit thereon, included in total minimum lease payments |
|
(264,921 |
) |
|
Net minimum lease payments |
|
606,180 |
|
|
Less: Amount representing interest |
|
(215,436 |
) |
|
Present value of net minimum lease payments |
|
390,744 |
|
|
Less: Current portion |
|
(57,028 |
) |
|
Long-term portion of capital lease obligations |
|
$ |
333,716 |
|
The summary of future maturities of our outstanding long-term debt as of September 30, 2011 is included in the commitments table in Note 11. |