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Telesat CEO Dan Goldberg at the company's headquarters in Ottawa, on Sept. 4, 2020.Justin Tang/The Globe and Mail

After half a century of operation, Telesat – one of Canada’s largest and oldest communications companies – is trying to transform itself with a new constellation of satellites. But after years of delays, analysts are increasingly concerned about the former Crown corporation’s ability to pay off its debts.

Two years ago, Telesat TSAT-T hoped that by now it would be preparing to launch the first batch of its new low-Earth orbit (LEO) satellites, designed to provide internet service to businesses and governments around the world. But the company has faced supply chain delays, higher costs as a result of inflation and plunging share and bond prices, reflecting worries about its financial health.

Telesat currently expects to begin launching its Lightspeed satellites in 2025 and starting service the following year. But it has yet to raise all the money it needs. Meanwhile, analysts say its existing business of geostationary satellites, while still profitable, is facing stiff competition.

Against this backdrop, the company’s key challenge is servicing its several billion dollars of debt, much of which matures in 2026 and 2027. In December, S&P Global Ratings reduced the company’s credit rating to CCC+.

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S&P analyst Madhav Hari said such a rating suggests a 50-per-cent chance of default, adding that the company will need “extremely favourable conditions” with its business plan to make timely payments on its debt.

“Telesat put all its eggs in one basket,” Mr. Hari said. “They have to execute on that to turn around the company’s credit. At this point we feel that they’re still quite vulnerable.”

Three days after S&P released its rating, Telesat’s stock hit its lowest point – $8.29 per share – since the company went public in November, 2021, at $49.76 a share to raise money for the Lightspeed project. The stock has since rebounded – it closed at $13.77 on Tuesday – but Telesat’s bonds were recently trading as low as 30 cents on the dollar, a level that suggests serious financial distress.

In a statement, Telesat spokesperson Lynette Simmons said the company now has $4-billion in financing arrangements of the US$5-billion ($6.7-billion) it needs for Lightspeed and has made “tangible progress” toward finalizing the remainder of the deals since its last quarterly report, in November.

About half of the funding comes from Ottawa: a $790-million federal loan and a $650-million equity investment. The company also has a $400-million commitment from Quebec (half-loan, half-equity). Ottawa will also provide subsidies to Canadian companies to ensure a strong customer base for Telesat’s services.

But the company will only get the government money if it can secure the rest of the funding. The balance is expected to come from export credit agencies. Last May, the company was in talks with Export Development Canada (EDC) and Bpifrance. EDC spokesperson Amy Minsky declined to provide details regarding any financing, saying only that the agency does rigorous due diligence.

If Telesat defaults on its debts, bondholders will have little claim to the funds it has injected into Lightspeed, Fitch Ratings analyst John Culver said. For the funds that are available, he said, the Canadian government will take precedence.

And if the company needs to raise further funds from private investors, it will face a challenge, he said. Interest rates have jumped sharply, and the possibility of a recession has put a damper on funding across the board.

The past year has seen a swift decline in Telesat’s fortunes. The company was near to closing its financing in the fall of 2021, but then supply chain issues delayed those talks and the company spent the first half of 2022 revising its schedules and budget. Chief executive Dan Goldberg told analysts last spring that he hoped to have more clarity by the summer, but in August he pushed that forward again to the winter, saying it wouldn’t be “unreasonable to believe” the company would have its financing term sheets in place by the end of 2022.

If it does secure the financing, Telesat will be going ahead with a smaller project than originally planned. The company initially hoped to send 258 new satellites into orbit by early 2023. But last spring it said it was reducing the count to 188, with 10 in-orbit spares, to stay within its budget.

Nonetheless, the company’s executives remain optimistic. Last year Telesat bought back about $200-million of its debt from the open market and re-signed a deal with Thales Alenia Space to build its Lightspeed constellation. (The Franco-Italian manufacturer backed out of a previous contract in 2021 because of supply chain issues.)

Mr. Hari of S&P acknowledges Telesat’s strengths: top-notch design and engineering, high-quality relationships in North America and Europe, and long service life. Unlike some competitors’ satellites, Telesat’s LEOs will last 10 years, not five.

But it’s unclear if customers will wait around for them. Competition is mounting from companies such as Britain-based OneWeb, which also offers enterprise, government and military services. In a statement, Howard Stanley, a vice-president for the Americas, said OneWeb now serves 60 locations in Canada’s North and plans to roll out service to the rest of the country early this year. (The company went into bankruptcy in 2020 after failing to secure a major investment but has since emerged from restructuring with support from government and private investors.)

Meanwhile, direct-to-consumer companies such as Inc.’s project Kuiper could compete for customers in the future. Amazon spokesperson Brecke Boyd said in a statement that while the company is primarily focused on residential customers, its network “will also have the coverage, bandwidth and flexibility to serve businesses, government agencies and other large organizations operating in remote areas.”

Mr. Hari said S&P is also concerned about the “erosion” of Telesat’s existing business.

Geostationary satellites offer service that’s good for satellite TV but not so useful for high-speed internet. Canadians are watching less satellite TV, turning instead to IPTV services offered by companies such as Bell and Shaw, Mr. Hari said.

The secular change is not only affecting Telesat. Other companies offering geostationary services have seen profits slashed by cancelled contracts – the result of recessionary pressures and inflation – and contracts in general are being renewed at lower rates, S&P analysts say.

Despite the headwinds, Telesat is still confident it will be able to deliver.

“As the largest space program in Canadian history, Telesat Lightspeed will deliver billions of dollars in investment and economic growth, while supporting over 1,500 high-paying Canadian jobs, positioning Canada at the forefront of the highly strategic global new space economy,” the company said in a statement.