10.19.10

Understanding the TerreStar bankruptcy filing

Posted in Financials, LightSquared, Operators, Spectrum, TerreStar at 2:41 pm by timfarrar

This afternoon, TerreStar Networks and various affiliates filed for bankruptcy, and entered into an agreement with EchoStar Corporation, its largest secured creditor, to provide the Company with a $75 million debtor-in-possession financing facility (as we surmised on Saturday). In addition, Echostar will support a restructuring premised on a debt for equity conversion by the Debtors’ secured noteholders, and backstop a $100 million rights offering that will provide the funding for TerreStar Networks’ exit from Chapter 11.

As shown in the diagram below from the TerreStar Networks Chapter 11 petition, the publicly quoted parent, TerreStar Corporation, did not file for bankruptcy, and presumably could continue to operate using the $2M per month that Harbinger is paying for its lease of the 1.4GHz spectrum. However, in the short term, this $2M per month will not be cash revenue, because the $30M advance received back in January covers payments for 15 months of the lease (i.e. until next May) and has already been spent. Thus it is unclear how TerreStar Corporation will find its near term operating funds.

UPDATE: TerreStar Corporation has now filed an 8-K confirming the tolling agreement to suspend its litigation with Highland Capital and that Highland, Solus and Harbinger have agreed to loan the company $1.25M for a period of 75 days. It appears that this may provide a window of opportunity to either negotiate a sale of the 1.4GHz spectrum or decide if TerreStar Corporation should file for bankruptcy. TerreStar Corporation has also agreed that its shares will be delisted from NASDAQ.

TerreStar Corporation will retain control of its 1.4GHz spectrum assets, but will see its shareholding in TerreStar Networks wiped out in the bankruptcy (note that both the TerreStar-1 and TerreStar-2 satellites and their 2GHz MSS-ATC spectrum allocation are included in the bankruptcy proceeding). As a result, the residual value of TerreStar Corporation will basically be equal to the value of the 1.4GHz spectrum assets. However, it is hardly plausible that this spectrum could be worth more than the $408M (+ accrued interest) outstanding in TerreStar Corporation’s preferred stock.

Though a TerreStar bankruptcy has been rumored for several months, it has been a long time in coming. This appears to have been caused by several changes in plan, as it appears the original intention was to try and avoid losing control of TerreStar Networks and its spectrum, and raise money against the assets at TerreStar Corporation, a task which apparently proved fruitless. There is no mention of any role for Harbinger in the press release announcing the Chapter 11 filing, so it will be interesting to see what happens next with the 2GHz MSS spectrum. However, it certainly appears possible that there could be yet another source of spectrum on the market competing for buyers with Clearwire and LightSquared.

2 Comments »

  1. kit said,

    October 20, 2010 at 7:59 am

    Highland capital must be hopping mad here as they own a large chunk of the preferred and wants their money back. They most likely will try to force the issue and take the co under to get their money…

  2. timfarrar said,

    October 21, 2010 at 1:35 pm

    According to the Epstein declaration (footnote 36 on page 30), “At that time [when negotiations commenced in April 2010], and up until recently, the Debtors contemplated that TSC [TerreStar Corporation] and TerreStar Holdings would file for chapter 11 as well. In light of recent events, including, without limitation, the agreement by certain parties to toll the litigation they were bringing against TSC, the Debtors decided that filing these entities for chapter 11 at this time would not be necessary, but note that such a filing may be necessary in the future”.

    Thus it appears that (at least for the time being) Highland Capital have suspended their litigation to force TerreStar Corporation to redeem their $90M of preferred stock.

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