Playing in the mud…

Posted in DISH, Financials, LightSquared, Operators, Regulatory, Spectrum at 9:40 pm by timfarrar

Judge Chapman concluded her ruling in the LightSquared Adversary Proceeding (which was published two weeks ago) by quoting Charlie Ergen’s famous statement that “[y]ou can live in a bubble if you want to…and probably never get any disease. But you go play in the mud and the dirt and you probably aren’t going to get disease either because you get immune to it. So you pick your poison and I think we choose to go play in the mud.”

She went on to remark that “Here, playing in the mud involved end-running the LightSquared Credit Agreement and then purposefully holding in limbo hundreds of millions of dollars of debt trades and undermining the ability of the Debtors, the constituents, and even the Court to conduct the case” and therefore ruled that “the SPSO Claim shall be equitably subordinated” in an amount based on “the amount of harm that has occurred to these estates as a result of SPSO’s conduct.”

Now the court-appointed mediator, Judge Drain, has filed a memorandum with the court stating that “SPSO/Charles Ergen have not participated in the mediation in good faith and have wasted the parties and the mediator’s time and resources. I understand the seriousness of this assertion; it is unique in my experience as a mediator in a field where the parties are known to assert their positions aggressively and sharp elbows in negotiations, although not welcome, are tolerated.”

It is pretty clear what Ergen is getting up to in the mud: by delaying a resolution of the case he buys himself time to seek a deal for DISH with Sprint and/or T-Mobile, while retaining a bid (either personally or by EchoStar) as a backup option, and in the meanwhile he accumulates interest on the non-subordinated portion of his debt.

While clearly irritating to the judges involved, Ergen’s actions are therefore perhaps not entirely surprising, so what is more interesting about Judge Drain’s memo is what it tells us about the terms of LightSquared’s new Chapter 11 plan. Of course the memo does not specify the terms of the agreement that all parties with the exception of SPSO/Ergen have reached, but it is pretty clear what those are, by reading between the lines.

Firstly, Judge Drain indicates that the new Chapter 11 plan “should be confirmable without the support of the one party, SPSO, which has not agreed.” That means that SPSO is no longer being treated less favorably than the other secured debtholders with respect to the non-subordinated part of its debt, and its agreement to the new plan is not required. That can only mean that SPSO’s non-subordinated debt is being paid in full, in cash, with accrued interest.

That also fits with Judge Drain’s statement that he had invited SPSO to make “a certain proposal by 5:00 p.m. on June 24, 2014 [which] was not made” since the requested proposal was clearly for SPSO to indicate the amount of subordination which would be acceptable. As I noted back in May, Judge Chapman’s ruling should allow at least $320M (face value) of SPSO’s holdings, and possibly as much as $540M to be subject to subordination, though the amount of harm might arguably be somewhat less. The non-subordinated debt would then accrue a total of at least 30% interest from the time of the bankruptcy filing over and above its face value.

If the subordination was only of the later purchases, then SPSO might be entitled to receive at least $660M including interest, and I would guess that the offer on the table from LightSquared’s new backers would then need to pay Ergen a sum relatively close to the $700M he originally paid for the debt.

UPDATE (7/2): The new plan, revealed in a July 1 court hearing, proposes to pay Ergen $470M in cash plus an unsecured note worth “at least $492M.” This implies that about $360M of Ergen’s holdings (at face value) are not being subordinated, which would roughly correspond to a cutoff on purchases up to the end of 2012, while the later purchases are being converted into the unsecured note. This cash payment is sufficiently low that its hardly surprising Ergen intends to fight the new plan.

The corollary to the subordination of part of Ergen’s debt holdings is that there can’t be any money left for the equity holders, since even after being subordinated, Ergen’s holdings would still be senior to LightSquared’s equity. As I’ve noted previously, CapRe wanted to reduce Harbinger’s equity position “to nothing” and they have also agreed to the new plan. That conclusion also fits with Melody and SK Telecom not being represented at the mediation, despite both of them holding interests in LightSquared’s equity. In contrast, Harbinger’s presence in the mediation would still be necessary given its holdings of debt in LightSquared Inc. and the desire to gain releases for Falcone and itself from any potential litigation, such as that proposed by SPSO in April.

UPDATE (7/2): Harbinger will still hold around 12% of the reorganized LightSquared equity, but this appears to relate solely to the rollover of Harbinger’s debt holdings at LightSquared Inc, and compares to a proposed 36% stake under the previous plan.

Melody’s lack of involvement also tends to suggest that it will potentially no longer be providing financing for the new plan, although that is still to be confirmed. Conversely, Fortress had up to five people there for each mediation session, plus two of their lawyers from Stroock & Stroock & Lavan LLP, suggesting that Fortress will be making the primary decision on how much to offer Ergen and will therefore likely lead the financing of the new reorganization plan.

The presence of two people from Cerberus at each session is also very interesting, and suggests that they may be the new source of financing, presumably replacing Melody (who in any case were closely tied to Harbinger, with Omar Jaffrey having led multiple LightSquared financings while at UBS). This appears to be confirmed by a Wall St Journal article.

It will now be interesting to see how both Fortress and Cerberus feel about the outcome of the FCC workshop on “GPS Protection and Receiver Performance” last week, where Tom Wheeler went to the trouble of noting emphatically that the meeting was “not about FCC-mandated receiver standards” and LightSquared received support from the White House (whose representative, Tom Power, was involved in discussions with LightSquared back in summer 2011) but apparently few other participants.

Remember that Cerberus’s involvement was proposed by Fortress but was unacceptable to Harbinger back in January, when “Mr. Falcone exercised those veto rights in the weeks after the January 23 meeting when he objected to Fortress’ suggestion that Tom Donahue of Cerberus join LightSquared’s board.” (see ΒΆ32 of SPSO’s proposed Findings of Fact). This appears to be further confirmation that Harbinger’s role in the new proposed capital structure for LightSquared is being cut back, as I indicated earlier this month and that’s why Phil Falcone has been threatening to sue the FCC.

Notably Falcone’s resignation from LightSquared’s board was communicated only in a June 18 letter to the FCC, which there would be no reason to send other than to ramp-up the pressure for the FCC to negotiate prior to Harbinger filing suit. In that context, one might view Wheeler’s (apparently last minute) decision to open the FCC workshop and make remarks supportive of GPS as a rejoinder to Harbinger’s threats.

UPDATE (7/2): Harbinger is still involved in the new plan (with a reduced 12% equity stake) which suggests that Harbinger may also continue to control the GPS litigation if the plan is approved, and this may be sufficient to mitigate the possibility of litigation against the FCC in the near term. However, given that the GPS industry seemed happy with the outcome of the recent FCC workshop, describing it as “a great event”, it seems they do not expect the FCC to be particularly accommodating to LightSquared in the immediate future.


MH370: analysis of where to look…

Posted in General, Inmarsat at 2:23 pm by timfarrar

Last week’s Wall St Journal article and my blog post highlighted that the MH370 search area was poised to move to the southwest, and yesterday this shift was confirmed by Inmarsat.

Although the location of this new search area has not yet been released, the independent team that has been analyzing the publicly available data felt it was appropriate to provide a statement, given below, with our best estimate of the highest probability (but not the only possible) location for a potential search. In this way, we hope to provide information which can clearly be seen to be completely independent of any locations that might be published by the search team in the near future.

The statement is as follows:

Shortly after the disappearance of MH370 on March 8th, an informal group of people with diverse technical backgrounds came together on-line to discuss the event and analyze the specific technical information that had been released, with the individuals sharing reference material and their experience with aircraft and satellite systems. While there remain a number of uncertainties and some disagreements as to the interpretation of aspects of the data, our best estimates of a location of the aircraft at 00:11UT (the last ping ring) cluster in the Indian Ocean near 36.02S, 88.57E. This location is consistent with an average ground speed of approximately 470 kts and the wind conditions at the time. The exact location is dependent on specific assumptions as to the flight path before 18:38UT. The range of locations, based on reasonable variations in the earlier flight path result in the cluster of results shown. We recommend that the search for MH370 be focused in this area.

We welcome any additional information that can be released to us by the accident investigation team that would allow us to refine our models and our predictions. We offer to work directly with the investigation team, to share our work, to collaborate on further work, or to contribute in any way that can aid the investigation. Additional information relating to our analysis will be posted on http://duncansteel.com and http://blog.tmfassociates.com. A report of the assumptions and approaches used to calculate the estimated location is being prepared and will be published to these web sites in the near future.

The following individuals have agreed to be publicly identified with this statement, to represent the larger collective that has contributed to this work, and to make themselves available to assist with the investigation in any constructive way. Other members prefer to remain anonymous, but their contributions are gratefully acknowledged. We prefer that contact be made through the organizations who have published this statement.

Brian Anderson, BE: Havelock North, New Zealand;
Sid Bennett, MEE: Chicago, Illinois, USA;
Curon Davies, MA: Swansea, UK;
Michael Exner, MEE: Colorado, USA;
Tim Farrar, PhD: Menlo Park, California, USA;
Richard Godfrey, BSc: Frankfurt, Germany;
Bill Holland, BSEE: Cary, North Carolina, USA;
Geoff Hyman, MSc: London, UK;
Victor Iannello, ScD: Roanoke, Virginia, USA;
Duncan Steel, PhD: Wellington, New Zealand.

A hundred Superbowls per sq km?

Posted in General, Regulatory, Spectrum at 4:02 am by timfarrar

Back in February, I wrote an article for GigaOm, questioning the unrealistic projections of future data traffic produced by the ITU Speculator model. Since then the conclusions of one of the studies I mentioned, conducted by Real Wireless for Ofcom in June 2013, have been amended to reduce the modeled traffic per sq km by a factor of 1000 (from 10 PB per sq km per month to 10 TB per sq km per month in suburban areas), by the simple expedient of changing the label on the chart axis in Figure 44. The new version of the report fails to give any explanation of why this thousandfold “error” occurred, or indeed how the new results are consistent with the ITU model (which of course does project traffic demand of petabytes per sq km per month by 2020).

Ofcom claimed by way of explanation, in a statement to PolicyTracker, that “since the report has served its purpose we do not plan to carry out any further work to update it,” but one therefore has to wonder exactly what that purpose was, if not to exaggerate future demand for mobile spectrum and/or shore up a model which even Ofcom now apparently considers to be in error by a factor of 1000.

Just to give another illustration of quite how badly wrong the Speculator model is, I thought it might be helpful to compare the predicted levels of traffic demand with that experienced during the Superbowl in 2014, which is documented in a Computerworld article from earlier this year. That article highlights that AT&T carried around 119 GB of traffic in the busiest hour of the game, while Verizon carried roughly 3 times as much as AT&T. Broadly, we can therefore estimate that the total amount of data traffic across all mobile networks in the busiest hour of what is widely viewed as the most extreme situation for mobile demand in the entire US (if not the whole world) is around 500GB in the square kilometer in and around the stadium (depicted in red below).

For comparison, the Speculator model projects that by 2020, the typical level of everyday demand that needs to be accommodated by mobile networks (excluding WiFi) in a dense urban public area will be 51 TB per hour per sq km, one hundred times more than the traffic level experienced in the busiest hour at the Superbowl in 2014.

When AT&T reports that data usage in the busiest hour of the game has increased by only a factor of four in the last 3 years, is it really credible to expect traffic at the Superbowl to increase by 100 times in the next 6 years? And even if traffic at the Superbowl itself grows by leaps and bounds, why should global spectrum allocations be set based on traffic in the busiest hour at the busiest location in the whole of the US? Clearly, a more rational conclusion is that the Speculator model is simply wrong, and cannot possibly be representative of typical scenarios for mobile data usage in 2020.


MH370: On the wrong track?

Posted in General, Inmarsat at 8:19 am by timfarrar

Since the Inmarsat ping data was released almost two weeks ago, I like many others have spent a good deal of time trying to discern what the data tells us. Particular thanks are due to Duncan Steel, Victor Iannello, Mike Exner, Don Thompson, Bill Holland and Brian Anderson, who’ve spent days and weeks performing numerous complex calculations and analysis of satellite and other data, much of which I’ve relied on in my analysis.

Although the data analysis remains a work in progress, and further information is needed to validate the BFO model in particular, I’ve now written up my initial conclusions, which indicate that the search area may need to be widened significantly beyond the areas identified in the most recent search effort. As the WSJ is reporting, this appears to be the approach now being taken by the investigative team.


Mediate this…

Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 6:18 am by timfarrar

Does the LightSquared bankruptcy case need a mediator or a psychiatrist? That’s what I’m wondering after learning that with the sole exception of Phil Falcone, all the creditors now agree on a revised plan for the company to emerge from bankruptcy. That plan apparently involves Harbinger being left with no stake in the reorganized company, as I predicted when Judge Chapman made her ruling last month. As a result, although the suggestion last week from the lawyer for LightSquared’s independent committee was that “A mediator could help us get over the finish line” it seems more likely that the current job for Judge Drain involves talking Phil out of “riding the bomb” and suing the FCC.

In any case, the lawyers involved appear convinced that ultimately Harbinger won’t be allowed to sue the FCC, because any potential claims against the FCC for suspending LightSquared’s ATC license would be property of the LightSquared bankruptcy estate, not of Harbinger. Thus, just like the bankruptcy court blocked Harbinger from proceeding with its litigation against the GPS industry (with LightSquared itself taking over this litigation), it seems that as part of the reorganization, the company would ask the court to prevent Harbinger from suing the government.

Judge Chapman certainly appears a little irritated about Phil’s actions, telling lawyers at an emergency hearing yesterday that she doesn’t like learning about developments in her cases “in the New York Post or the Wall Street Journal.” So it will be interesting to see how long she gives the mediation, especially given the rapid depletion of LightSquared’s existing funds, and whether she agrees that in fact Phil just needs to see a therapist instead.