Its certainly been an eventful week for LightSquared (why is it that whenever I go on vacation something significant seems to happen?) and press reports have indicated that we are now moving a lot closer to my prediction in January that creditors would force the company into bankruptcy before all the money had gone, with Mr. Icahn apparently indicating that he is seeking a debt for equity swap to squeeze out Harbinger.
Mr. Falcone has responded by suggesting that he is “seriously considering” a “voluntary bankruptcy” as “one of several options” for the company. More pointedly, yesterday he indicated (in a very explicit reference to Icahn) that this would be an attempt to “protect the company from creditors who are more interested in a quick flip”.
Of course, the idea that Harbinger could remain in control rests on Falcone’s view that “a bankruptcy would not necessarily wipe out the equity holders of LightSquared because the spectrum it owns retains value” (something that I’m told debtholders consider simply “delusional”). At this point in time, the LightSquared spectrum is only usable for satellite services, which its very hard to believe could generate any positive value (because it would be difficult and time consuming for the satellite business even to reach cash flow breakeven).
As I’ve said in the past, the best case is that 20MHz of the spectrum might be usable in a decade or more for a terrestrial service, but if you have to wait a decade for the spectrum to be usable, and LightSquared’s “$10B waiver” has been withdrawn, then its hard to see why anyone would pay more than the $1.4B DISH paid for 20MHz of TerreStar spectrum last summer. Unfortunately using the spectrum at all would require maintaining the lease deal with Inmarsat at an NPV cost of somewhere between $1.5B and $2B (depending on the discount rate applied), which would need to be deducted from the above sum, and so its not clear that there is any positive value for the spectrum under this scenario either.
The last remaining hope to have some usable (and valuable) spectrum in the near term is to engineer a spectrum swap, but that would rely on the DoD showing some goodwill towards LightSquared, something which has hardly been evident to date.
As a result, after a voluntary bankruptcy filing, we would be thrown headlong into a valuation fight, where the debtholders tried to argue to the judge that LightSquared’s likely attribution to itself of a $2B-$3B valuation and proposed cramdown of the first lien debt was simply not feasible. It is difficult to see LightSquared prevailing, when the basis for a high valuation of the spectrum is simply not sustainable. However, these arguments will tie the company up in court for the rest of the year, and in the interim presumably Harbinger would try to stay in charge.
The timing of a bankruptcy filing is likely to be dictated not only by the April 30 expiry of LightSquared’s waiver in respect of the covenant breach from the termination of the Sprint agreement, but also by the status of LightSquared’s Cooperation Agreement with Inmarsat. Earlier this week, a deal appeared to be on the table whereby LightSquared would make the missed February payment of $56M and give up any claims that Inmarsat had failed to complete Phase 1, in exchange for a two year deferral of further payments. However, LightSquared appears reluctant to pay out additional money to Inmarsat when a bankruptcy filing would also prevent Inmarsat from terminating the Cooperation Agreement and could still allow LightSquared to reach a resolution with Inmarsat later on if that was felt to be useful. As a result, I expect LightSquared’s bankruptcy filing to come before the April 20 deadline on which Inmarsat can terminate the Cooperation Agreement for default, and plausibly it could be made over the weekend of April 14/15.
Mr. Falcone has also taken to the press to accuse “the FCC of bowing to special interests” by blocking his “shovel ready” project. The article suggests that he “first got into the telecom business in 2010″ when he “placed a $14 billion bet on what he thought was a sure thing”, which of course is revisionist history at its worst. In fact Mr. Falcone had been an investor in the predecessors to LightSquared and TerreStar since 2004, and made most of his purported $2.9B investment well before 2010.
Since the FCC granted the SkyTerra transfer of control (including various ATC license modifications and what appears to have been an implicit promise of a later waiver) to Harbinger in March 2010, the investment has mostly come from third parties. By my calculations, Harbinger has only invested about $700M into LightSquared over the last two years (including the cost of buying out minority equity investors in SkyTerra), while other investors have put in roughly $2B.
A better account of the history would be that by late 2009 (when Harbinger decided to buy out the other investors in SkyTerra), Harbinger had already invested over $2B in this project which had all gone to waste. At that point, Mr. Falcone desperately tried to rescue his losing bet (with assistance from the FCC) by persuading other people to invest their money into this supposedly valuable spectrum.
Remember that Harbinger also invested almost $1B in TerreStar’s equity and preferred shares from 2005 through 2010, attempting the same trick of converting satellite spectrum for terrestrial services, and that also was lost when Echostar acquired TerreStar’s senior debt and pushed Harbinger out, just as Icahn is likely to do in LightSquared. Ironically, back in August 2010, when TerreStar was on the point of bankruptcy, Falcone also claimed to Reuters that TerreStar’s senior debt was easily covered by its spectrum value. He was wrong then, as DISH’s ultimate bid was just enough to pay off the senior debt (which Echostar held the majority of) at par and unsecured creditors lost most of their claims (while the equity in TerreStar Networks was worthless). In the case of LightSquared it appears he will be wrong by an even greater margin, because GPS interference and the Inmarsat lease costs will dramatically reduce any interest in buying the LightSquared spectrum, and make it hard even for secured creditors to realize much of a recovery.