06.08.11

Could LightSquared default on its first lien debt?

Posted in Financials, LightSquared, Operators, Spectrum at 7:01 pm by timfarrar

As concerns continue to swirl around Harbinger and LightSquared, one unexamined issue is whether any FCC (or Congressional) action to restrict LightSquared’s access to the upper part of its spectrum or revoke the January waiver could put LightSquared in default on its $1.5B of first lien debt.

Because this debt offering was private, it is not possible to examine the indentures which specify the events of default. However, TerreStar’s first lien debt indentures are public and probably provide some guidance as to the likely language in the LightSquared debt indentures. TerreStar’s debt indenture states that the events of default include:

(10) (a) failure by the Issuer and the Guarantors to receive the U.S. FCC Letter of Intent Authorization by July 31, 2008; or (b) a revocation, cancellation or relinquishment of (i) the U.S. FCC Letter of Intent Authorization or (ii) any FCC authorization held by the Issuer or a Restricted Subsidiary of the Issuer to operate ancillary terrestrial component facilities, unless the revocation, cancellation or relinquishment (x) remains subject to reconsideration, review, or appeal at the FCC or any court, provided that during the pendency of such reconsideration, review or appeal the Issuer is permitted to utilize the related spectrum and continues to conduct its business in the ordinary course, or (y) is accompanied by the issuance of a substitute or successor license, permit, or authorization of substantially equivalent utility;

While some features are not directly analogous (because, as a Canadian-registered satellite system, TerreStar held a Letter of Intent Authorization from the FCC rather than a License), the critical language would appear to be “a revocation, cancellation or relinquishment of … any FCC authorization held by the Issuer … to operate ancillary terrestrial component facilities, unless the revocation, cancellation or relinquishment (x) remains subject to reconsideration, review, or appeal at the FCC or any court, provided that during the pendency of such reconsideration, review or appeal the Issuer is permitted to utilize the related spectrum and continues to conduct its business in the ordinary course“. If LightSquared’s current ATC waiver was revoked or even if the waiver remained in place but LightSquared was rendered unable to use all of the “related” spectrum for its ATC operations, then (assuming similar language is in the LightSquared first lien debt indentures) an argument could plausibly be made that an event of default had occurred.

Of course, just because an event of default had occurred (and any such proposition would be vehemently resisted by Harbinger), that does not necessarily mean that the first lien debtholders would take action to enforce their rights. However, if a truly dire outcome (such as Congress forbidding the FCC from authorizing LightSquared’s terrestrial operations) did come to pass, then the debtholders might be better off trying to get hold of the cash on LightSquared’s balance sheet before it was all spent, and trying to renegotiate the spectrum lease agreement with Inmarsat before all of the Phase 1 payments had been made. Certainly I would expect all of these options to be under active consideration, as the first lien debtholders in LightSquared contemplate the various possibilities for what happens next.

2 Comments »

  1. TMF Associates MSS blog » Let’s blame the FCC (or maybe Inmarsat?) said,

    September 8, 2011 at 10:05 pm

    [...] not without a future application showing what would be an impossible proof of non-interference). As I’ve noted before, that might conceivably put LightSquared into default on some of its debt agreements, though of [...]

  2. TMF Associates MSS blog » The first shoe to drop? said,

    September 30, 2011 at 10:06 am

    [...] priced at roughly 50 cents on the dollar) and may be looking for any opportunity to assert that an event of default has occurred under the first lien indentures, before all of LightSquared’s current cash has been spent. That explains why LightSquared is [...]

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