03.15.12

Extend and pretend…

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 1:54 pm by timfarrar

Bizarrely enough, the price of LightSquared’s debt has been increasing over the last week, as the company failed to file for bankruptcy in advance of the termination of their agreement with Sprint, which is expected to come today, and LightSquared hired lawyers to sue the government for compensation, once their ATC license is revoked by the FCC. The primary reason for this delay appears to be that major investors (Icahn/Appaloosa/Beal, who may hold as much as $500M-$600M in face value of the $1.6B in first lien debt) are sitting on the sidelines, apparently unable to decide what they would do if they forced LightSquared into bankruptcy, while UBS (who may still hold $300M-$400M of the first lien debt) certainly do not want a bankruptcy (because then they would probably become a target for litigation).

As I understand it, if LightSquared continue to pay the interest on their debt (of which ~$50M in cash is due on April 1) then a two-thirds vote of debtholders would be needed to force the company into bankruptcy, and so I now expect that LightSquared will probably make the interest payment due at the end of this month. Once Sprint return $65M to LightSquared after their agreement is terminated, and with payments no longer being made to Inmarsat, LightSquared will then still have over $200M in cash on its balance sheet at the end of the first quarter, allowing LightSquared to continue to pretend (for potentially the rest of this year) that they can succeed with a lawsuit against the FCC or obtain a spectrum swap from the government. The only large near term outstanding payment is the repayment of around $300M due at the end of June on LightSquared’s holding company loan, and LightSquared are suggesting that the sale of their terrestrial spectrum leases will be enough to cover this repayment (though that assumes both a favorable proposal from the FCC next week and a lot of interest in the 1670-75MHz spectrum).

Of course if LightSquared do drag this situation out for so long, then the potential recovery for investors may be considerably less than I originally anticipated. LightSquared appears unlikely to challenge the termination of its deal with Sprint, thereby writing off $236M that was advanced to Sprint last year, and may also allow its deal with Inmarsat to expire on April 20, thereby preventing any deployment of a terrestrial network in their L-band spectrum in the future and potentially giving up the $490M paid to Inmarsat so far. In addition, there may be little or no cash left on the balance sheet, limiting any recovery and perhaps even raising the possibility of DIP financing being needed for a lengthy bankruptcy. Thus its hard to see why investors would regard a delay in a bankruptcy filing as a positive development for the company.

In the meantime, LightSquared also continues to have bad luck with its satellite, after the new SkyTerra-1 satellite suffered a lengthy outage last week, leaving its existing satellite customers (over 200K terminals) without service from March 7 to March 11. While the satellite does not appear to be damaged, this event will undoubtedly be exploited to raise further doubts about whether customers could rely on the LightSquared satellite for service, assuming the second satellite remains a ground spare rather than being launched into orbit.

This development may also make it harder to come up with an alternative satellite-only business plan to preserve the LightSquared business while the FCC considers whether to allow terrestrial use in the L-band at some point in the distant future, after a lengthy transition period to allow GPS and MSS terminals to be upgraded.

However, it was already difficult to envisage such an outcome, when the majority of panelists on the spectrum panel I moderated this week at the Satellite 2012/MSUA-9 conference estimated that it would take 15-30 years before any terrestrial network could be deployed in the L-band MSS spectrum, beyond the end of life of the SkyTerra-1 satellite.

3 Comments »

  1. Argo4288 said,

    March 17, 2012 at 5:39 am

    I think the effect of end of the Cooperation Agreement has been underestimated. The end of the agreement will certainly end LightSquared’s ability to offer terrestrial service, but I think it also depresses the value of their spectrum going forward and certainly makes their spectrum less attractive for a possible spectrum swap.

    Prior to the Cooperation Agreement, the L band spectrum was composed of numerous small slices of spectrum interwoven. There were no large contiguous blocks of spectrum. I am quite certain that LightSquared only owned portions of the 2×10 MHz blocks in the lower L band.

    Any further thoughts on this?

  2. timfarrar said,

    March 17, 2012 at 6:58 am

    I don’t think a spectrum swap is a realistic option, not least because otherwise LS would have couched their “demand” differently. Also the DoD is not going to do anything (in terms of a swap) to keep LS alive, and the White House want this to go away before the election. The best way to do that is for the FCC to have the International Bureau rule as per the Public Notice and then LS have to submit a Petition for Reconsideration to the full Commission, and have it ruled on, before they can file suit in Federal court. There is no deadline for the FCC to act on this Petition so this would certainly stymie LightSquared’s legal threats against the government until the end of the year.

    With respect to the situation after termination of the Cooperation Agreement (prior to completion of the Phase 1A payments) it remains uncertain whether the allocations would go back to the situation before the whole rebanding started, or whether LS would have some added spectrum contiguity compared to what they did before. However, it is clear that LS have to give up some amount of spectrum to Inmarsat in a default situation, which could further impair any possible contiguity in the lower L-band. LS are all but certain to commence legal action against Inmarsat, once Inmarsat terminate the Cooperation Agreement for default in April.

  3. TMF Associates MSS blog » Is the FCC’s NPRM designed to fail? said,

    March 21, 2012 at 1:54 pm

    [...] avoid the looming financial crunch at the end of the second quarter of 2012, when LightSquared must repay a roughly $300M loan to its [...]

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