Financing space-derived data as commodities
by Lucien and Paul Rapp
Monday, March 21, 2022
The once-exclusive place—still dominant today—of states in civil and military space activities has for a long time concealed the difficulties of their financing. The opening to competition of a real market of space activities, whose economic operators are no longer only public or para-public entities, highlights them today.
| How do you seize a satellite in orbit in case of default? |
These difficulties are of several kinds. They are certainly due to the necessary mobilization of financial means to accompany the new operators, from seed capital to growth capital. The establishment of public and private incumbents, the appearance of dedicated funds or space business angels, and the diversification of financial techniques starting with the recent development of SPACs, are gradually providing appropriate solutions, at the same time as space activities, which have become more accessible and undoubtedly more profitable, are also more attractive to large international investors.
They are also related to the problem of counterparties likely to guarantee external financing, since these are assets or activities that are, by nature, beyond human control. How do you seize a satellite in orbit in case of default? At best, one can only apprehend the flow of income from its operation and transiting through pledged accounts or the ownership of corporate financial securities (shares, bonds, and their derivatives) likely to be mobilized in the event of difficulties. Which generally leads to very specious typologies in terrestrial assets, assets attached to or attachable to terrestrial operations, and assets sent into outer space and therefore difficult to access.
Finally, the difficulties of financing space activities are due to the context of these activities and particularly, the very rapid evolution of the global industry and the markets that are opening to it. Until recently, this industry was designed to accompany exploration activities with very limited economic spinoffs. Then, industrial sectors were created around a few major clients and a relatively frustrated value chain: design, construction, and launch of satellites; supply of commercial communications, tracking, or earth observation services. Today, the time has come for ecosystems of very bold and agile companies, positioned in the three market segments that have now been identified: the earth-to-space segment (design, construction, launch of satellites), the space-to-earth segment (communication, geolocation, Earth observation), and the space-to-space segment (provision of in-orbit services).
In addition, there are the effects of a new stage in the profound transformation of the global space industry. After the double privatization initiated in the last decade of the 20th century and their commoditization in the sense of the mass production of miniaturized satellites that, consequently, are easily accessible to an increasing number of companies from very different sectors, the time has come for the dematerialization of space activities in the sense of the duplication of the space infrastructure and the services it allows to offer, but even more so of the rise of data of space origin and their processing. The duplication of infrastructure and services will lead, as in the telecommunications industry, to the devaluation of the former in favor of the latter. Space could thus become before long a service activity. The abundance of data from space should fuel the development of increasingly sophisticated commercial services as the processing of this data should benefit from the progress of artificial intelligence and quantum computing. The space industries, already beneficiaries of the digital revolution, should be the first to benefit from two major technological revolutions of the 21st century.
However, the development of a service industry using data from space raises the question of its financing and, particularly, that of the working capital requirements of the producers of such space derived data.
| The abundance of data from space should fuel the development of increasingly sophisticated commercial services as the processing of this data should benefit from the progress of artificial intelligence and quantum computing. |
Working capital requirements are an essential indicator of a company’s financial health, allowing it to assess its ability to cope with cash flow shortfalls resulting from the difference between cash outflows and inflows. In more trivial terms, it is the amount of money needed to meet current financial needs (such as salaries, loan repayments, taxes, utilities, sourcing, assets operations, etc.) in the hope that the revenues generated by its activities will offset them. This explains why a company’s working capital requirements are generally covered by revolving credit facilities that are granted by its financial partners. Their existance and sustainability depend on the confidence inspired by the company’s business plan and their pricing depend on the profile of the guarantees and/or the securities that the company can provide to its lenders. This is where we find the difficulties previously described for the financing of space activities as opposed to other Earth-based tangible activities. Space actors can find it difficult to apply the well know principle, “the more you secure, the less you pay.”
Indeed, as financial institutions make a crucial focus on the risk management and more particularly on the manner of controlling the risks all along the life of the financing, all the difficulty resides on finding how to propose a comprehensive and attractive security package to a bank.
How can this be done?
The purpose of the setup described below is to transpose to the space sector the type of setup generally used for commodities finance, with the exception that data of space origin immediately raises the problem of its nature and, consequently, the regime of its ownership.
What is legally data and, in particular, space-derived data?
This is a question whose answer conditions the feasibility of any financial arrangement. Data is a legal object that is very imperfectly defined by national laws and regulations. In truth, one cannot find a definition of data, and particularly of computer data, in a legal text or case law with universal scope. At most, it can be observed that computer data is not the information with which it is often confused. It is only its representation in a conventional form imposed by the computer program that produces it. But computer data is also different from information because it is intended to allow its processing. These are two characteristics that allow us to better understand what space data is. It is data containing information produced from space and likely to interest space itself (climatic events affecting space) or terrestrial activities. In this second case, it is in principle obtained by observation of the earth from a space object. The data of space origin are today processed on earth, but they will probably be processed tomorrow in space on specialized platforms.
There remains the sensitive question of its ownership regime. It is today partially resolved by the legal status recognized to software in the texts of national law as well as to databases. Software as well as databases are indeed legal institutions susceptible to appropriation. As such, they are legally protected. However, the property right of the producer of a database is more a monopoly of exploitation, like that of the holder of a patent or an intellectual property right, than a property right in the strict sense. It allows him to oppose any substantial extraction of data from the database in which he has invested. A collection of data of space origin can thus constitute a database, protected by a monopoly of exploitation against any substantial extraction of data.
This analysis was, for a moment, proposed to ensure a legal protection of images produced from data of space origin. The idea was to argue that an image produced from space data was a collection of pixels, each pixel being itself a data item, which made it possible to claim legal protection of the whole, i.e. the image itself, assimilated to a spatial database. This analysis did not prevail, but this does not prevent the images produced from spatial data from being the object of "transfer of ownership", ultimately in the practice of many contracts in use for the benefit of the customer who orders and purchases them.
Could space-derived data be considered as a commodity?
Commodities are usually legally known as products or substances of any kind that can be serviced, processed, traded, brought, or sold.[1]
Even if commodities are generally admitted being coming from natural resources such as cotton, ores, oil, or grains, this concept can be interpreted extensively and considered as including almost any article of movable or personal property.[2]
| Since data of space origin could be considered as a commodity, there would be no obstacle to the creation of companies trading in such type of assets. |
To this respect, and considering that the property rights over data of space origin belongs to the entity producing them, a company that produces such data either to process them or to have them processed in order to meet the expectations of a clientele of service providers from space or of end-users, or to market them directly without processing them in the framework of a wholesale market as opposed to a retail market, could perfectly be compared to a traditional Earth commodities producer and seen as a commodities producer.
Indeed, what would be the difference between a company operating a wind turbine farm to produce energy and a company operating a nanosatellite constellation to produce “raw data” that is processible, transferable to third parties, and usable on Earth or by other space objects involved in a given value chain?
In our view, there is no difference, and data of space origin can perfectly be considered as a new kind of space commodities being part of more global trend of the “space commoditization.”[3]
How to finance the production of such space commodities with reasonable pricing?
Let’s take the assumption of a tripartite scheme involving a space-derived data producer, whether or not it processes the data and whether or not it uses the processed data (the “Producer”) and operating a given space asset (the “Space Asset”), its client (the “Customer”), and the Producer’s financing bank (the “Bank”).
The envisaged financing scheme would work as follows and would be based on revolving credit facilities (bilateral or syndicated) under a single national regime or under a mixed regime combining different regimes, depending on the nationality of the parties:
1) The Producer, in order to serve its Customer by operating its Space Asset, draws on its credit facilities for the purpose of financing its working capital requirements linked to the operation of the Space Asset or to that of the space-derived data that this Space Asset allows to produce.
2) The Producer then sells the space-derived data to its Customer, whether it is an intermediate Customer (the retailer who will process the data provided to offer commercial services) or an end user consuming commercial service.
3) The Customer performs his payment obligation under the space-derived data purchase contractual arrangement on an account opened in the name of the Producer in the books of its Bank.
4) The payment(s) made by the Customer under the space-derived data purchase contractual arrangement shall immediately be applied by the Bank to the repayment of the amounts utilised by the Producer, thus making the repaid portion of the credit facility immediately available for other use.
For the Producer to propose a “bankable” financing scheme to the Bank, it is important that the Producer proposes a strong security package that would give all necessary comfort to the financial institution. Again, such comfort would come from the control that could be given to the Bank of the space-derived data, all along the value chain and its commercial journey from its production to its sale to the Customer.
Such security package could include:
a) A pledge granted by the Producer in favor of the Bank over the Producer’s account on which the Customer performs its payment obligations under the space-derived data purchase contractual arrangement.
b) An assignment of the Producer’s rights under the space-derived data purchase contractual arrangement, which would allow the bank to secure the repayment of the drawings made under the credit facility to cover the Producer’s working capital requirement, without recovering the Producer’s obligations such as data production and/or delivery obligations.
c) To the extent of what has been previously observed concerning the legal nature and ownership regime of space-derived data, a security interest over the space-derived data produced by the Producer or, better, in a database that gathers them. This would allow the Bank to have a security interest over the “commodity” (eg. the space-derived data) itself.
d) These data or databases could also be kept in an entity of its own in charge of their commercialization and whose shares would be pledged in favor of the Bank. It is well known that banks, as a matter of principle, are not keen on holding the direct ownership of the underlying assets that they cannot store, use, or transfer directly (in this case, to process for the provision of services) in an enforcement scenario.
e) Another option is the creation of a third-party holder who could be the keeper or simply the guarantor of the safekeeping and availability of data of space origin. This third party would therefore enter into a multi-party contractual arrangement with the Bank, the Producer, and the intermediate or final Customer, a contract in which one would organize the control of the data of space origin and in particular the possibility which would be opened to the Bank, of blocking their delivery in the event of a default of the Producer under its credit facilities.
This security package voluntarily excludes a security interest over the Space Asset nor over the shares of a company owning the Space Asset, as an assumption is made that such Space Asset is itself subject to a specific financing arrangement which includes negative pledge undertakings.
Furthermore, since data of space origin could be considered as a commodity, there would be no obstacle to the creation of companies trading in such type of assets. Even more prospective: for the acquisition and successive sales of such data of space origin, payment instruments usually used for commodities could find a relevant application. In particular, documentary credits and letters of credit could circulate according to a distributed architecture using the blockchain, which would anticipate the eventual combination of space, blockchain, and commodities techniques and activities.
Endnotes
- See Cambridge dictionary definition and Black’s Law dictionary definition.
- See Black’s law dictionary definition.
- See L. Rapp, “From Space to SPAC” SFDI Symposium, Pédone 2021 p.85.
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