On Wednesday afternoon, it emerged that Jefferies’ attempts to raise a $3B exit financing facility for LightSquared had failed, with news that the debt was being split into two tranches, a first lien of $2B, with an increased interest rate (3% extra of Pay In Kind interest) and additional warrants (10% of diluted equity instead of 5%, with all of the warrants immediately vested, instead of the warrant grants increasing over time). In other words, third parties didn’t believe that LightSquared’s spectrum was worth more than $2B, even with the required FCC approvals. The terms of the $1B second lien were not specified, except that it would be all PIK interest and the syndication of this facility would be “handled” by Harbinger.
On Friday, the New York Post revealed that LightSquared plans to ask the bankruptcy court to force Charlie Ergen’s Sound Point Special Opportunities (SPSO) fund to accept this second lien debt, because, according to Harbinger’s court filing on Wednesday, Sound Point “fraudulently entered LightSquared’s capital structure…to prevent the Debtors from successfully reorganizing and acquire the Debtors’ assets on the cheap”. Instead Harbinger, wants the court to extend the July 15 exclusivity deadline, allowing LightSquared to pursue its own reorganization plan.
Its not a little ironic that Harbinger describes Ergen’s $2B offer for LightSquared’s satellite assets and spectrum as a “low ball bid” when Jefferies has only been able to raise $2B of debt secured against all of LightSquared’s assets, including its Crown Castle lease, and it will be interesting to see how the court views Harbinger’s arguments. As I noted on Monday, it seems like fantasyland to believe that the FCC will simply give LightSquared the 1675-80MHz spectrum band in the next few months and so it might not even be possible to get hold of the $2B loan and pay off the other (non-Ergen) debt in the foreseeable future. Presumably that is why (according to the NY Post article), LightSquared plans to borrow another $200M of DIP financing to extend its cash runway into next year.
However, LightSquared will of course be supported by everyone else in the capital structure apart from the secured debtholders, because Ergen’s proposed $2B bid would do little more than pay off the secured debt, and so LightSquared’s plan is their only chance of a recovery. As a result, we saw MAST and US Bank claiming in their court submission on Monday that FCC approval is “near certain”, a ludicrous distortion of the reality of the situation, based only on Genachowski’s expressed opinion, in response to my question, that the L-band will ultimately “be freed for terrestrial use”, which supposedly “foreshadowed approval of the application”.
Its therefore going to be very interesting to see how things develop at Tuesday’s status conference. Although the subordination plan may not be discussed in detail at that hearing (I’m told it will likely be published on July 15), it would certainly be a dramatic move if the court decided to subordinate Sound Point’s $1B holding to $2B of new debt, raising the possibility that Ergen’s $1B will never be repaid if LightSquared is unable to realize more than $2B when it tries to sell its spectrum. Then perhaps Phil can commiserate with Charlie that this is how it feels to lose $1B by investing in LightSquared…