09.28.10

What is Plan B for TerreStar?

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 10:36 am by timfarrar

Back in August, it looked very much like TerreStar was poised to file for bankruptcy, using a large DIP facility of $200M+ to fund the company for the next several years while it attempted to build a satellite roaming business. Harbinger indicated at the time that it believed a bankrupt TerreStar’s spectrum was worth $1.5B to $2B. This suggests that (as we speculated) the plan may well have been to cram-up the ~$1B of first lien debt that is outstanding at TerreStar Networks. However, it appears that Blackstone was unsuccessful in finding takers for that financing, and so the question arises as to what is now their Plan B for TerreStar.

In TerreStar’s 2010Q2 10-Q, filed in early August, the company stated that “there is substantial doubt that the available cash balance, investments and available borrowing capacity as of June 30, 2010 will be sufficient to satisfy the projected funding needs for third quarter of 2010″ and yet we are now at the end of the third quarter and there has been no bankruptcy filing. AT&T also announced the commercial release of the Genus phone last week. Some have therefore suggested that this means TerreStar is likely to avoid bankruptcy, because AT&T would not have gone to market with the phone immediately prior to a bankruptcy filing.

Of course, if TerreStar had actually secured further investments, these would have to have been disclosed in an 8-K filing, but it is certainly clear the company has managed to make its cash resources last longer than it previously expected. One possibility is that AT&T paid upfront for the Genus phones it is selling, which would have provided some cash for TerreStar without the need for a public filing. It would also explain why AT&T is keen to move ahead with the commercial launch if it now owns several tens of thousands of Genus phones.

UPDATE: According to documents filed in the TerreStar bankruptcy proceeding, Echostar and Harbinger allowed TerreStar to draw a further $10M from the Purchase Money Credit Facility, and agreed to waive any claims of potential default. However, given that the bankruptcy documents show only a few hundred thousand dollars of expected receipts for TerreStar from phone sales by the end of the year, it still appears possible that either AT&T may have paid upfront for the phones it expects to sell, or (perhaps more likely) Elektrobit has been left holding the bag, given the substantial losses it expects to book on its TerreStar receivables.

However, TerreStar obviously also needs to raise further funds to cover its ongoing operating expenses. It has a window of time until August 2011 when no cash interest is due on TerreStar Networks’ first lien debt, and so it appears plausible that raising say $50M+ at TerreStar Corporation (presumably against the security of the 1.4GHz spectrum) would be (barely) sufficient to see the company through to next August, when the outcome of the FCC’s MSS NPRM/NOI should be clearer.

This might well still require a bankruptcy filing by TerreStar Corporation (depending on what happens with the outstanding $408M of Preferred Stock, since the company has certain obligations to redeem the Preferred Stock if it has more than $10M in available funds), but we assume that Blackstone might conceivably look to keep the TerreStar Networks subsidiary out of bankruptcy (assuming this is permitted by the cross-default provisions on the first lien debt) and thereby enable TerreStar Corporation to retain its shareholding in TerreStar Networks.

Then, if it turned out that the FCC’s NPRM allowed the 2GHz satellite spectrum to be monetized for more than the value of the outstanding first lien debt (something we regard as unlikely), the proceeds could potentially flow to the owners of TerreStar Corporation (although it is implausible that an auction could occur by August 2011 so there would certainly still be significant arguments about the value of this spectrum). In addition, this outcome would ensure that TerreStar’s 2GHz spectrum is not on the market as an alternative to LightSquared, while Harbinger seeks to secure partners for its LTE network buildout over the next 9 months.

UPDATE: From the TerreStar bankruptcy filings, it does not appear that the approach we speculated about would have been feasible, presumably at least in part because it was not possible to raise money against the security of the 1.4GHz spectrum, and in the last few weeks the alternative plan to accepting a deal with Echostar was to try and prime the first lien debt which Echostar controlled at TerreStar Networks. However, in the end TerreStar has had to take a $75M DIP from Echostar and agree to the restructuring plan which Echostar proposed.

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