The Case for Asset-Based Financing for the Space Sector

Both long standing and recent trends in the space industry have shed light on new needs for financing space activities. The development of new ventures in the space sector has created new demands for financing while displaying peculiar characteristics shared by only a handful of other industries.

The level of capital expenditure intensity in the space sector knows few matches in the economy, creating difficult arbitrages for investors and for financing space activities in general. Investments in the space sector can be discouraging for investors due to the long time required before equity break-even. The COVID-19 crisis has expanded the stress put on access to finance for systemic reasons and strengthened the need to find new financing schemes.

To address the issue, one solution is to increase recourse to asset-based financing in the space sector. This is a financial practice that has long existed in other industrial sectors and while it is not new to the space industry, it could gain momentum in the future. Asset-based financing works by providing capital to companies that offer assets as collateral to guarantee repayment to the creditor. In the case of the space industry, satellites could be used as collateral, and reusable launchers could very well join the club in the coming years.

Yet, obstacles remain before asset-based finance can be optimally adopted in the space industry. The mobile and movable nature of some space assets creates an issue that will create legal certainty concerns as to the law applicable to creditors.

Initiatives have emerged at the international level to try offering a more business-friendly regulatory environment that would favor financing space activities. One example is the Cape Town Convention, a system that applies to the financing of high-volume expenses related to assets that are mobile, movable, and thus subject to conflicting rules of law that could apply and nullify asset-based financing agreements. The convention, approved by the European Union and which counts 79 contracting parties, is supplemented by individual protocols that apply to aircraft equipment, railway, and mining. But of more specific interest is the Berlin Protocol on Matters Specific to Space Assets (2012).

The Cape Town Convention facilitates asset-based financing by providing creditors who backed projects with a series of remedies against defaults and insolvencies that also fasten the obtaining of financial reliefs following the determination of a creditors claim on the merits. Because the Cape Town Convention provisions bring together different international signing parties, they strengthen legal predictability in financing transactions by providing a clear framework of which legal rules apply in case of a default.

Asset-based finance is facilitated by creating an international web-based registry of all vested interests in a given mobile asset, available 24/7. It builds on the concept of asset-based financing where companies can receive working capital and loans in exchange for assets as collateral. When assets are mobile, like in the aircraft, rail or space sectors, understanding the location of the assets as well as all other vested interests in the asset is essential to provide guarantees to creditors that their financial rights associated with their securities will be secured. Overall, this increases the guarantees and the confidence of potential creditors who will be more prone to granting credit loans and will reduce borrowing costs and credit insurance premiums for commercial players performing space activities.

For a sector like space, the Berlin protocol facilitates asset-based finance in an industry that is constantly searching for innovative ways of securing access to capital for investment in high-value projects. Article 1(2)(k) of the Berlin space protocol specifies that it applies to “a spacecraft, such as a satellite, space station, space module, space capsule, space vehicle, or reusable launch vehicle (RLV)” and also includes payloads and parts of a spacecraft or a payload, covering a large spectrum of space assets. It particularly recognizes the importance of revenue streams in relation to the space asset for the creditor and also covers the Tracking, Telemetry and Control (TT&C) of space assets including the encryption keys giving control over a satellite, allowing for their transfer to a creditor who may establish control or operate the space asset.

A survey conducted by BHO Legal for the United Nations Office for Outer Space Affairs (UNOOSA) has confirmed that cross-border enforcement of financiers' security interests is an important concern in the space industry. Most financiers interrogated mentioned that advancements like the Cape Town Convention and its Berlin Protocol would help reduce the risk of financing the space industry. In particular, there could be potential in bridge financing, intended to cover a company's short-term costs until regular long-term financing is secured, as well as third stage/mezzanine financing and second stage financing phases.

The Cape Town Convention along with its Berlin protocol dedicated to space assets are direct contributions to offering a better legal regime for asset-based financing of space activities and can be seen as a major contribution to regulatory innovation in contributing to the development of the space sector. VS Mathieu Luinaud is a senior associate within the PwC Space Practice. His experience covers space domains from upstream to downstream. He has worked extensively with satellite manufacturers and satellite operators on business model development and market assessments.