07.17.10

Could this week mark the beginning of the end for ATC?

Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 7:17 am by timfarrar

The FCC’s NPRM/NOI issued on Thursday clearly indicates that we are approaching the point where the 2GHz band will be redesignated for terrestrial-only use, with the ATC rules abandoned, and some form of compensation paid (to the government) for the step-up in value accruing to the current 2GHz spectrum holders. It also looks quite possible that any attempts to offer MSS services in those bands could be discontinued, despite the $1.5B spent to date on satellites by DBSD and TerreStar. Ironically, this comes at a time when the only real barriers to ATC deployment are economic and financial, rather than technical.

Even more significantly, the Wall St Journal is reporting that Harbinger is now seeking a $400M debt investment “to keep the [SkyTerra MSS-ATC] project moving forward” and “pay off debt coming due in the months ahead and other expenses related to the wireless plan”. This is a dramatic turnaround from the $1B to $2B of equity and bank financing that Harbinger was reported to be seeking back in April.

SkyTerra has numerous expenses coming due in the months ahead, according to its 2009 10-K, including $120M of vendor notes payable to Boeing, for which the principal is “due in full in December 2010″. Other items listed include the senior secured discount notes (cash pay from October 2010), and various other amounts related to next generation network construction, satellite launch services, and the “chipset, device and satellite base station subsystem” (which totalled an expected $150M during 2010, though could presumably be cut back). According to SkyTerra’s 2009Q4 results presentation in March 2010, the company also estimated it will need to pay $70M for insuring the SkyTerra-1 satellite launch (which is currently scheduled for August 17).

Given these expenses, $400M of new debt wouldn’t provide much money to pay for any large scale terrestrial network deployment. More to the point, will Harbinger be able to continue to fund TerreStar, which has been costing about $10M per month to keep afloat, in addition to SkyTerra (note that SkyTerra’s existing funds were used for the most recent injection of $40M into TerreStar via a “Satellite Minutes Agreement”)? I’m sure we will see the answers to that question very soon, given that Harbinger’s current 90 day exclusivity agreement with TerreStar (signed on May 6) expires on August 4.

4 Comments »

  1. PCSTEL said,

    July 17, 2010 at 9:48 am

    While it is true that some Skyterra Communications funds were used for the “Satellite Minutes Agreement”. The amount that came from Skyterra’s Comm funds was 35 million, with the other 5 million supplied by Harbinger’S (Skyterra LP).

    While the 40 million dollar payment may have seemed large. The reality is that a large portion of the payment was already guaranteed by Skyterra for Chipset Development with Qualcomm and Infineon.

    The Skyterra System Costs in your illustration above shows ~25 million due for chipset development by the end of Q3. Since these costs are shared between Skyterra and Terrestar. Legally, I believe Skyterra would have been liable for payments representing the other half (25 Million),if Terrestar failed to make said payments.

    So, in my opinion, Skyterra simply provided Terrestar with the necessary funding to make the required payments, that Skyterra would have ultimately been responsible for.

    For the other 15 million, Harbinger got a lease negotiation lock-up period, as well as a commercial pre-purchase agreement that has effectively “tied” the 2Ghz spectrum and the satellite together. Thus, in the event of a petition, it may be difficult for the spectrum to become divorced from the satellite and future service requirements due to the ongoing contract requiring the availability of the pre-paid “Satellite Minutes Agreement” well into the next decade. It is my opinion that this pre-paid service contract may substantially reduce the attractiveness and final value of the Terrestar assets to a non-Harbinger affiliated suitor, should a Petition ultimately be filed.

    I would suggest that if Terrestar were to act in the best interest of it’s shareholders, it should agree to return a paired 5Mhz (10Mhz total) in exchange for participation in a future incentive auction. This asset sale would provide some amount of additional liquidity to continue operations. However, with the inclusion of the requirement of AT&T terrestrial voice and data services, as well as a $25 monthly Satellite access fee as a prerequisite to access Satellite Airtime via the Genus™. The Terrestar Genus™ MSS Service is now likely one of the most expensive service options in the MSS sector, as the phone with it’s Windows Mobile 6.5 operating system is nearly already obsolete.

    PCSTEL

  2. xnxtxsx2 said,

    July 17, 2010 at 5:25 pm

    PCSTEL. What do you put Terrestar Pps at if it did this asset sale as you mentioned above?

  3. timfarrar said,

    July 17, 2010 at 8:58 pm

    Its important to note that:
    a) there will be no incentive auctions at all unless Congress changes the law to allow them
    b) there will be no incentive auctions in the 2GHz band until the current rulemaking is completed, the FCC approves such a policy (which it may or may not do), the incumbent holders agree to the proposed revenue share and then the FCC schedules and conducts an auction.

    As a result, there is no possibility of TerreStar being able to use the (far from certain) incentive auctions as a means of resolving its current funding situation. Even if such an auction did take place it is implausible that their share of the proceeds would be distributed to the incumbent spectrum holders before 2012-13.

    Incentive auctions are in any case most likely an all or nothing option in the 2GHz band: either an incumbent gives up all its spectrum and exits in exchange for a share of the proceeds or it doesn’t take part (indeed most likely both incumbents would have to agree to take part). A partial solution would not maximize the proceeds (as it would involve an isolated 2x5MHz block of spectrum) and would still leave the ATC rules applicable to the remaining spectrum that was not relinquished.

  4. PCSTEL said,

    July 18, 2010 at 6:42 am

    Yes, Incentive Auctions will ultimately require Congressional approval. It should be noted that the Incentive Auction proposal is the backbone of the NBP, as it is the main motivational tool to hopefully spur interest in the return of substantial amounts of “underutilized” spectrum in other Band Plans as outlined in the NBP. Without Incentive Auctions, there is no incentive to participate (especially outside the MSS bands).

    While it is true that no “direct” financial proceeds for an Incentive Based Auction would be available for quite some time in the future. The question is that of “increased investment” or access to capital markets.

    You opine that a “partial solution would not maximize proceeds”, and that Incentive Auctions are most likely an all or nothing option. I disagree. The NPRM specifically considers other approaches in the 2Ghz Band. Specifically injecting the possibility of providing a path for incumbents to return “some of their spectrum”(29) in exchange for providing Terrestrial Flexibility in the remaining non-surrendered portions under the proposed “Fixed and Mobile allocation” authorities versus the current ATC gated service rules. Thus providing a theoretical 50/50 revenue share without the requirement of an Incentive Auction.

    All well and good under the concept that a given 2Ghz incumbent and it’s largest shareholder who controls the Board would actually want that outcome to pass. Of which I am skeptical.

    The MSS Band is adrift with spectral inefficiencies, and I am a firm supporter of maximizing public interest by increasing those efficiencies. Globally harmonized systems should take top guardianship by the FCC, as additional authorized globally harmonized spectrum assignments can be claimed as instinct. In the ITU administered Big LEO Band Plan. I am a strong supporter of maximizing use of these Bands for terrestrial operations in the top 100 markets, provided sufficient preemptive and priority access technologies are provided to law enforcement/first responders. However, I believe that MSS operators that are afforded these flexibilities should be required to provide compensation to “the public” by providing appropriate satellite-based communications equipment and services to local, state and federal agencies. Just as Television Stations provide “public interest” programming and airtime in exchange for their “no-cost” spectral authorities.

    The shortage of spectrum in metropolitan areas is not unique to the United States, and other countries will undoubtably look to similar solutions in the future. The FCC should carefully consider it’s regulation of the Big LEO Bands, as their policies may be used as a template in other countries. Will there be other countries who seek to abide by their treaty obligations while maximizing localized spectral efficiencies? I believe so. Priority and Preemptive technologies in large metropolitan areas should be at the forefront of this plan.

    PCSTEL

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