Investing.com -- Fitch Ratings has revised its outlook for SES S.A. to negative from stable, while affirming the company’s Long-Term Issuer Default Rating (IDR) and its senior unsecured rating at ’BBB’. The revised outlook reflects Fitch’s concerns over potential investments for the IRIS2 project and the acquisition of Intelsat S.A., which may not allow key financial metrics to recover within the expected time frame.

Fitch anticipates that SES’s financial metrics may not recover to within the rating thresholds over the next 18 to 24 months due to upfront investments for the IRIS2 project and the acquisition of Intelsat S.A. The ratings agency would revise the outlook back to stable if cash flow from operations (CFO) less capital expenditure (capex) is likely to return to above 12% of gross debt, if EBITDA net leverage falls below 2.3x and if the integration of Intelsat progresses as planned.

Fitch has also tightened the leverage thresholds for SES’s rating by 0.2x to reflect higher-than-expected cash flow volatility due to challenges arising from sector trends and competition.

SES is on track to close the acquisition of Intelsat in the next six months following a lengthy regulatory clearance process. Fitch’s updated base case for the combined entity remains largely unchanged, with stronger-than-expected financial performance at SES in 2024 offsetting slightly weaker metrics at Intelsat. Fitch continues to expect leverage metrics to reduce to within the thresholds for a ’BBB’ IDR within 18 to 24 months following the completion of the transaction.

The acquisition of Intelsat for $3.1 billion (EUR2.8 billion) will create a leading global satellite operator with strong scale and a multi-orbit, multi-band constellation. This will better position the businesses to meet competitive threats, invest in innovation, R&D, target higher value, solutions-based revenues and better serve its customers with improved cost efficiency. The combination will also improve geographic diversification.

SES expects the acquisition will generate about EUR210 million of run-rate annual operating spending savings and EUR160 million of run-rate capex savings, with 70% of them targeted for delivery within three years of transaction close.

SES is likely to receive proceeds from a $460 million insurance claim relating to the historical operational failures of some of its satellites and the potential sale of up to 200MHz of C-band spectrum in the US. At the last auction in 2020, SES and Intelsat collectively received $8.7 billion for clearing 280MHz.

SES has a mixed credit profile with some infrastructure qualities. This reflects some revenue visibility based on long-term contracts in the direct-to-the-home video segment, a cash-generative business model and barriers to entry from regulated orbital positions. This is offset by risks from increasing competition, increases in industry capacity, technology obsolescence and substitution.

Fitch’s key assumptions, pro forma for the acquisition of Intelsat include combined revenue of EUR3.97 billion in 2025, declining by 1.5% in 2026 and growing by 0.8% in 2027, combined Fitch-defined EBITDA (pre-IFRS16) of EUR1.7 billion in 2025, gradually increasing to EUR1.97 billion by 2027, and capex of EUR1.1 billion in 2025, decreasing to EUR0.7 billion by 2027.

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