In yesterday’s Wall St Journal article about lenders “turning up the heat” on Phil Falcone (which surprisingly failed to mention whether he is sweating or not) it was intriguing to note that the article was changed during the day by the removal of one critical sentence. Specifically the version of the article as it was original published on Friday morning and then updated on Friday afternoon (at 3.28pm ET) contained the following paragraph:
The lenders believe Mr. Falcone has become a lightning rod that has made dealing with Washington regulators too difficult and threatens to upend the company’s chances of success, the people said. The lenders believe there are signals coming from Washington that show a willingness to engage in dialogue over LightSquared’s woes, but that Mr. Falcone’s presence could impede progress, one of the people said.
However, in the final version of the article (from 6.41pm ET and as published in today’s paper), this paragraph was simplified to:
LightSquared needs the regulators’ blessing for its nationwide mobile broadband network to succeed. The lenders believe Mr. Falcone has become a lightning rod who has made dealing with regulators more difficult, the people said.
This change might be taken to imply that there is some sensitivity on the part of the first lien lenders to even the vaguest hint that their billions of dollars could now succeed in securing a spectrum swap, when Falcone no longer has the billions to achieve that goal. After all, as I noted back in January 2011 and has been clear from the number of lobbyists hired by the company, LightSquared certainly felt that it was necessary to throw a great deal of money around in order to gain approval for its network.
One of the counter arguments coming from Harbinger is that “they doubt Icahn will get better results from DC” especially if (as Falcone claims) the debtholders are only interested in a “quick flip”. More importantly, I suspect that (as the change in the WSJ article suggests) after all that has happened in the last year, the FCC, White House and Congress will all now be extremely sensitive to any inference that money can buy LightSquared some love in DC, whether we have a Democratic or Republican administration after the election in November.
UPDATE (4/30): Last night the WSJ reported that Falcone has agreed to step aside “eventually” in exchange for a one week extension of the waiver of LightSquared’s debt covenant violations. This will allow negotiations on an extension of the waiver for 18-24 months, conditional on Harbinger agreeing to substantial dilution of its equity stake. The WSJ article suggests that debtholders do not want LightSquared to file for bankruptcy, because that would potentially allow Harbinger to maintain control.
However, it seems that the more plausible concerns relate to the assumption by both sides that any spectrum swap would come relatively soon after the November presidential election, and so by tying up the company in bankruptcy, Harbinger could preserve the chance of a recovery for its equity for much longer. This would be similar to DBSD, which originally planned to hand over the company to its second lien debtholders when it filed for bankruptcy in May 2009, but after a very prolonged stay in bankruptcy (due to Sprint and DISH’s appeals of the reorganization plan), eventually sold the assets to DISH in an auction in early 2011, paying off the second lien debt at par and providing a recovery for the equity holders (ICO Global).
We therefore still have to see if Falcone will be prepared during this week’s negotiations to countenance an immediate substantial dilution of Harbinger’s equity as a condition for avoiding bankruptcy. Clearly such an action would lock in a significant loss to Harbinger, as opposed to preserving all of the equity upside in a bankruptcy situation. Conversely, a bankruptcy filing would run the risk of Harbinger losing everything, if the debtholders can persuade the judge that the assets available simply do not justify contemplating a recovery for LightSquared’s equity holders. As a result, at the end of this week there could well be a significant gap between the equity dilution Harbinger would accept (perhaps less than 50%?) and that demanded by the debtholders (80%+?). In those circumstances, a bankruptcy filing and valuation fight might be the only remaining option for both sides.