GeoEye bonds have quietly slumped since netting multiple rating downgrades after the company told investors that government contracts face under-funding risk. The 9.625% first-lien notes due 2015 are pegged just below par, versus 104.25/105.25 prior, while the 8.625% second-lien notes due 2016 are off four points, at 106.25/107.25, according to sources and data provided by S&P Capital IQ.

GeoEye received a two-notch downgrade by S&P today, with corporate credit lowered to B-, from B+, following Moody’s move yesterday by one notch to B2, from B1. Both agencies cited the geo-mapping-satellites company’s announcement on Friday that the National Geospatial-Intelligence Agency (NGA) is seeking to shorten contract terms due to funding shortfalls.

The company’s $400 million issue of 9.625% first-lien notes due 2015 have in two days been cut to B/B1, from BB-/Ba3, while a $125 million issue of 8.625% second-lien notes due 2016 have been lowered to CCC/Caa1, from B-/B3. The credit outlooks were put to “developing” and “negative review.”

GeoEye received two letters from the NGA that it cannot exercise the full-year Enhanced View Service Level Agreement option with the company for the contract year beginning Sept. 1, 2012, but instead proposes a three-month option. The proposal includes and option to extend for the full year if funding were to become available, according to SEC filings.

S&P ‘s downgrade cited “heightened risk of a substantial reduction of U.S. government revenues beginning in late 2012 or in late 2013, which would severely reduce the company’s profitability and cash flow generation.”

“Accordingly, we have revised our business risk assessment to ‘vulnerable’ and our financial risk assessment to ‘highly leveraged,’” offered S&P credit analyst Michael Weinstein.

GeoEye owes investors interest in October and April each year, and a Bloomberg report yesterday cited an analyst at Benchmark Company as saying that GeoEye may not be able to make the April coupon next year if the contract isn’t extended via the nine-month extension option.

GEOY shares have plunged 22% on the news, to $14.24, from $18.34.

GeoEye bonds date to late 2010 and late 2009 issuance via J.P. Morgan, Bank of America, and Deutsche Bank. Proceeds were used for general corporate purposes and debt refinancing efforts, respectively. – Matt Fuller

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