Chinese whispers…

Posted in Financials, Inmarsat, Operators, Services, VSAT at 9:40 am by timfarrar

Inmarsat has certainly had a great deal of success in the last two months, winning key contracts with the US Navy, Lufthansa and most recently Singapore Airlines, as well as a strategic partnership with Deutsche Telekom to built out its S-band European Aviation Network. While some of these wins may be a direct result of what Inmarsat refers to as “success-based capex” (otherwise known as giving away free terminals), these deals certainly have the potential to provide a significant boost to the company’s revenue growth outlook.

Moreover, it seems that the biggest deal is yet to come, as Inmarsat hinted on its results call last week that “customers in different regions [are] vying to have the [fourth GX] satellite placed over their areas of interest” and the plan for this satellite is expected to be finalized before Inmarsat announces its Q4 results in early 2016. However, in practice there is one deal which is far and away the most likely outcome, and it appears these statements are simply a matter of Inmarsat trying to make sure that it still has some negotiating leverage.

That deal was clearly apparent during last month’s State Visit to the UK by Chinese President Xi Jinping, when the only British company he visited was Inmarsat. Inmarsat highlighted that one purpose was “to understand how Inmarsat is able to uniquely contribute to President Xi’s One Belt One Road (‘OBOR’) strategic vision through the provision of critical global mobile broadband connectivity services, including Inmarsat’s revolutionary new service, Global Xpress” and noted that “Inmarsat has already signed a Memorandum of Understanding (MOU) with China Transport Telecommunication & Information Centre (CTTIC) to establish a strategic partnership to deliver Inmarsat’s revolutionary Inmarsat-5 Global Xpress mobile satellite broadband communications connectivity throughout China and OBOR.”

I’m told that the original intention of President Xi’s visit, accompanied by HRH The Duke of York and the UK Chief Secretary to the Treasury, was to have a signing ceremony for the agreement to formalize this “strategic partnership” and that would involve a full lease of the fourth GX satellite to China. Unfortunately the final agreement required certain changes and therefore could not be completed in time.

However, assuming this deal can be completed, Inmarsat is likely to receive a further significant boost to its revenues. Given Chinese expectations are typically that they will receive lower prices than other countries, I’d expect the payments to Inmarsat for capacity could potentially be on the order of $100M p.a. (assuming the agreement is for 10+ years), depending on who covers the capex and opex costs for the new GX gateways in China. And China could then be in a position to provide free or subsidized satellite broadband capacity to adjacent countries in support of its geopolitical OBOR ambitions, just as Google and Facebook have been working to bring Internet access to developing countries.

Once this deal is done, Inmarsat can move onto ordering I6 satellites with both L-band and Ka-band capacity, in order to supplement the (somewhat limited) capacity of the initial GX constellation. But with Eutelsat apparently looking for French government backing to buy a 3-4 satellite Ka-band system, and ViaSat (not coincidentally) announcing the intention to build its own even bigger 1Tbps satellites, the race to add lower cost Ka-band capacity is far from over. More importantly, despite all the attention given to Ku-band HTS in the last year or two, its hard to agree with the statement Gogo made on its Q3 results call (after its GX distribution deal with Inmarsat was terminated) that “there are simply not enough Ka satellites now or for the foreseeable future to meet the needs of global aviation”.


French kiss off…

Posted in Broadband, Financials, Globalstar, Inmarsat, LightSquared, Operators, Regulatory, Services, Spectrum, VSAT at 9:20 pm by timfarrar

Paris is the place to be in September for satellite industry gossip (though not the weather), and this year is no different. There’s been plenty of chatter already about the MSS sector, as people look forward to Inmarsat’s upcoming investor day on October 8. The company has seen some good news recently, displacing Intelsat General to win a large US Navy contract last week. However, Inmarsat’s aggressiveness on price is highlighted by the reduction in the total ceiling price from $543M last time around to only $450M over 5 years (which is in turn perhaps double the US Navy’s most likely spending profile). Though this contract should help Inmarsat show top line revenue growth in 2016 and beyond, a significant proportion of the capacity (in C, Ku and X-band) will have to be bought in from other players, limiting Inmarsat’s ability to make a profit.

However, the other main news about Inmarsat is that the company is expected to order its first I6 L-band satellite before the end of 2015, and it will include substantial additional Ka-band capacity to supplement the rather limited amount of capacity available on GX, even after the fourth GX satellite is launched in 2016 or 2017. That will likely mean a total capital expenditure of $450M-$500M, plausibly repeated once or twice more in the next few years, just to keep Inmarsat in the bandwidth race.

There’s also been some chatter about the FCC regulatory situation as it affects Globalstar, where a source confirms that my suppositions in June about the purpose of Globalstar’s change in tone to the FCC were correct and that a deal was on the table to approve terrestrial use just for Globalstar’s own MSS spectrum and not the wider 22MHz TLPS channel. However, this approval was only going to be for low power use, and would therefore not be of much import, except as a demonstration of regulatory progress.

Then after Jay Monroe met with several FCC Commissioners in late July he withdrew this potential compromise and insisted instead on full TLPS approval, presumably believing that if permission either to use the unlicensed spectrum or high power terrestrial use or the MSS band was treated as a separate, second stage of the process, a conclusion would be delayed for years, making it impossible for Globalstar to deploy or monetize its spectrum anytime soon.

So now it seems we are back to an impasse, and though Globalstar has recently added some additional information into the docket on an experimental deployment in Chicago, this documentation doesn’t provide quantitative information on (for example) the exact rise in bit error rates seen by services like Bluetooth, merely observing that no observable performance impact was noted. As a result, I believe it is unlikely that the FCC will feel able to rule on full TLPS approval anytime soon (i.e. this year).

Ironically, Globalstar’s consultants are also acting for LightSquared, and have proposed a similar program of tests for GPS interference, again based on a “KPI” criteria of observable degradation in performance, rather than actual quantified impact on the signal to noise ratio. Most observers seem to believe that LightSquared is no more likely to gain FCC approval for its plans than before, and that after the recent publication of the DOT test plan for their Adjacent Band Compatibility study, the FCC will wait for those tests to be conducted, which could take a considerable period of time.

Predictably LightSquared is already criticizing the DOT test plan, very likely setting us off on exactly the same well trodden (and ultimately disastrous) path as before. As a result, I’m sure that those hedge funds who committing funding to the bankruptcy plan (especially those in the $3B+ second lien, which sits behind $1.5B of first lien debt) must now be feeling pretty nervous. I wonder if any of them will now be frantically searching to see if they have any way to avoid funding these commitments once the FCC approves the transfer of control?

Finally, in yet more FCC-related news, the consensus here seems to be that the 14GHz ATG proceeding may also fail to reach a conclusion in the near term, as I predicted earlier this month, due to the uncertainty over how to protect NGSO systems. Instead, ViaSat’s Ka-band solution seems to be going from strength to strength, with the hugely positive reactions to the performance on JetBlue contributing to their recent win at Virgin America and to other airlines taking another look at what will be the best future-proof solution. All this makes Gogo’s predictions that its US market share is secure and that its revenue potential is “like a gazillion dollars” seem just as foolish as it sounds.


Gogoing, gone?

Posted in Aeronautical, Inmarsat, Operators, Regulatory, Services, Spectrum at 4:14 pm by timfarrar

Often I wonder whether some companies understand how the FCC works and what they really shouldn’t say in an FCC filing. Gogo has just provided a classic example in its August 26 ex parte filing that tries to counter SpaceX’s recent intervention in the 14GHz ATG proceeding, where Gogo has been trying to get 500MHz of spectrum auctioned for next generation ATG networks.

Unfortunately for Gogo, it has been left as virtually the sole active proponent of this auction, after Qualcomm laid off the team that developed the original proposal and stopped participating in the proceeding. While I’m sure Panasonic and Inmarsat would take part if an auction was held, undoubtedly they are relishing the prospect of Gogo struggling to improve its “infuriatingly expensive, slow internet” service with 2Ku capacity that Gogo itself admits is roughly the same cost per Mbyte as its existing ATG-4 network (at least until it can renegotiate its current bandwidth contracts).

So when Gogo makes submissions that directly contradict those it previously put into the record, it shouldn’t be surprised if the FCC regards these rather skeptically. In particular, in July 2014 Gogo told the FCC that it “supports the proposed §21.1120 requirement that interference from all air-ground mobile broadband aircraft and base stations not exceed a 1% rise over thermal” whereas now “Gogo concurs with Qualcomm in that a 6% RoT has a negligible impact on the cost and performance of an NGSO system while creating an additional and disproportionate level of complexity or loss of performance for the AG system” and “Gogo supports the 6% RoT aggregate interference levels initially proposed by Qualcomm”. So suddenly Gogo thinks that its a perfectly acceptable to have six times more interference than a year ago.

Even more of a hostage to fortune was Gogo’s September 2013 comment about the unacceptable problems that an ATG network (referred to as Air to Ground Mobile Broadband Service or AGMBS) would cause for NGSO systems like that proposed by SpaceX:

“In its initial comments, Gogo expressed its concern that Qualcomm’s assumptions regarding the operating parameters of the hypothetical NGSO satellite systems were not representative of typical or worst case system configurations, and that the interference between a future system and AGMBS systems could be far greater than indicated by Qualcomm’s estimates. Gogo is not alone in this view, as the Satellite Industry Association (“SIA”), ViaSat, EchoStar and Hughes all raised similar concerns in their comments. SIA included an analysis within the Technical Appendix attached to its comments which illustrates the potential for much greater interference than had previously been calculated by Qualcomm. In Gogo’s view, some aspects of the analysis are subject to challenge because it overstates the level of interference that may be expected. Nevertheless, the overall conclusion remains valid – an AGMBS system operating consistent with the proposed rules would cause unacceptable levels of interference to many, if not most, possible future Ku-band NGSO system configurations. The analysis of EchoStar and Hughes, provided in Annex B of their comments, provides additional support for this conclusion. Similarly, ViaSat’s comments indicated that the NGSO analysis presented by Qualcomm is not representative of the range of potential Ku-band NGSO systems which have been previously proposed.”

Yet now Gogo, having previously claimed that Qualcomm’s calculations were flawed, suddenly decides that after “incorporating [SpaceX's] stated parameters into the Qualcomm interference calculation methodology” everything is fine and “the resultant RoT from an AG system into the SpaceX NGSO system is far less than [its newly relaxed] 6%” interference criteria.

I can only conclude that Gogo must be truly desperate to get the 14GHz ATG proceeding completed, because it needs the capacity ASAP. However, making contradictory filings is certainly not going to help the company to get a favorable ruling from the FCC anytime soon (especially when politics is lurking in the background, in the form of the Association of Flight Attendants expressing concern about the FCC taking action on this matter).


All at sea?

Posted in Inmarsat, Iridium, KVH, Maritime, Operators, Services, VSAT at 8:53 am by timfarrar

Despite the delays in the launch of GX, it seems Inmarsat may be looking to stitch up an even larger share of the maritime market in the near term. Rumors are flying that Inmarsat may soon make a formal bid to acquire KVH, the largest maritime VSAT player in terms of vessels (though not in revenues), adding about 3500 more terminals to Inmarsat’s existing 2200 VSAT equipped ships.

KVH generated nearly $80M from its miniVSAT business in 2014 with an average service ARPU of $1500 per month, compared to Inmarsat’s $90M and ARPU of $4000 including equipment leases (this equates to $2500 per month after stripping out hardware, according to Inmarsat’s most recent results call, which is a more appropriate point of comparison with the KVH ARPU).

The difference in ARPUs between Inmarsat’s current VSAT business and KVH is striking, in fact KVH’s smaller V3 terminal (which has about 900 active terminals) is generating around $500 in monthly ARPU, below even Inmarsat’s FleetBB ARPU of $700 (note that the standard FleetBB package sold by KVH now only provides 20 Mbytes per month of data for $749, whereas KVH offers airtime at rates as low as $0.99 per Mbyte).

If Inmarsat does move ahead with a KVH bid, it would likely be seen as a counter to Airbus’s disposal of its Vizada business unit, because Inmarsat would then have by far the largest number of VSAT-equipped ships. Indeed it would not be surprising to see attempts by competitors to block the deal on antitrust grounds, not to mention the concerns that current KVH customers will have about potential future price increases.

However, it would also be something of an acknowledgement that GX is optimally positioned as a lower end off-the-shelf maritime VSAT service (like KVH’s miniVSAT), as a step up from FleetBB, rather than as a high end solution for cruise ships and oil rigs. KVH’s growth has slowed in the last year, with terminal shipments staying at close to 1000 per year in 2012, 2013 and 2014, but net adds and ARPUs declining. Pressure from Inmarsat will only intensify, once the low cost 60cm GX antenna is available with global coverage, so this looks like it would be a good time for KVH to sell out.

Inmarsat investors will presumably also welcome a deal, with a much clearer path established to a GX maritime business of $200M+ in annual service revenues over the next few years (though its important to note this represents a retail service business, not the wholesale spend on satellite capacity). However, the obvious question that customers will ask is whether low end price packages will still be offered for miniVSAT users, or whether Inmarsat will move them up to much higher price points, as it has done with FleetBB over the last few years.

And what will be the alternative for these users: will it be other VSAT solutions, or will it be the new broadband services (comparable in capability to FleetBB) offered by Iridium’s NEXT constellation? It will take some time for either of these options to emerge, with low cost small Ku-band VSAT antennas needed for the former, and completion of the NEXT constellation needed for the latter. That provides a further motivation for Inmarsat to move sooner rather than later, while its freedom of action in the low end of the maritime market remains relatively unconstrained by competitive alternatives.


Masa’s choice…

Posted in DISH, Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum, Sprint at 7:35 am by timfarrar

If I’m right and DISH is determined to win a significant AWS-3 spectrum position at the end of the auction, then it seems highly likely that one or both of AT&T and Verizon will leave the auction with a significant shortfall in AWS spectrum in major cities including New York, Los Angeles and potentially several other markets.

Then it seems Ergen’s calculation is that he will have significant leverage to force AT&T and Verizon to deal with him and lease spectrum on his terms (including supporting interoperability for his AWS-4 spectrum holdings). However, one way for AT&T and Verizon to freeze Ergen out and avoid having to make a deal would be for them to instead purchase 2.5GHz spectrum from Sprint. Its plausible that Sprint could raise as much as $10B relatively easily from selling say 30MHz to each of AT&T and Verizon, leaving Ergen holding an asset with no clear route to monetization and a buildout deadline which will start to become a pressing concern within a year or two (especially if DISH has not yet standardized the AWS-4 band).

So does Masa Son want to boost DISH’s position at the expense of AT&T and Verizon, or would he like to get revenge for DISH’s actions in the Sprint & Clearwire bidding wars last year? If DISH is stuck with billions of dollars of spectrum it can’t lease, then DISH will be disadvantaged in mounting a competing T-Mobile bid, when Sprint renews its attempts after the 2016 Presidential election, because DISH will struggle to raise as much cash and DT will be reluctant to accept shares whose value is based primarily on spectrum assets with limited utility (remember that T-Mobile isn’t in a position to create an ecosystem for AWS-4, unlike AT&T and Verizon).

In fact, Sprint could point to DISH’s reserves of spectrum as providing the basis of a new competitor in the wireless market, and could even gain the tacit endorsement of AT&T and Verizon for a purchase of T-Mobile. In addition, by selling some spectrum now, Sprint raises money to participate in the 600MHz incentive auction (where DISH may not have the resources to compete) and gets out from under the spectrum screen limitation. So it might well make sense for Masa to make a choice which boosts AT&T and Verizon, rather than cooperating with DISH.

Incidentally, another side-effect of the AWS-3 auction prices is that Phil Falcone is now scrambling to get back into the LightSquared reorganization plan, as his argument that LightSquared’s spectrum should be valued at more than the debt gains support from these price benchmarks. For example, the unpaired uplink 10MHz B1 block (1700-1710MHz), currently valued at almost $1.3B, will be used to argue that LightSquared’s two 10MHz uplink blocks alone are worth double this sum. So the obvious counterstrike from Ergen is likely to be to try and blow up the reorganization plan and force LightSquared into liquidation.

I understand conversion to Chapter 7 would invalidate the Inmarsat Cooperation Agreement, and thereby make it much harder for anyone to take on the risk of buying LightSquared’s assets. Of course, that is unlikely to worry Ergen (he would be expected to take a hard line with Inmarsat in any case), and would provide an opportunity to potentially buy LightSquared’s satellite assets for considerably less than the value of the LP debt and boost Ergen’s attempts to corner the spectrum market. As one person close to the case told me, such an outcome would literally make Judge Chapman cry.

UPDATE (11/26): Another interesting question is the status of the 650M MHzPOPs of EBS spectrum (38MHz) that NextWave holdco controls in New York City. I would expect hectic bidding to secure access to that spectrum, if DISH turns out to be the winner of much of the AWS-3 spectrum in New York. Of course, Ergen has likely already thought of that, and I’d speculate that he might even have locked up an agreement to buy that spectrum block in advance of the AWS-3 auction, making it harder for Verizon and AT&T to address their potential spectrum shortfall in the New York market.


New statement re MH370

Posted in General, Inmarsat, Operators at 11:36 am by timfarrar

The independent group analyzing the loss of MH370 has now issued a new statement, responding to the release of the June 26 ATSB report.


Independence Day…

Posted in DISH, Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 2:20 am by timfarrar

After the NTIA filed a fairly devastating letter with the FCC on July 1 (which went completely unnoticed in the press), it seems that Phil Falcone decided to use the July 4th holiday to assert his own independence from LightSquared, and attempt to blow up both the company and its relationship with the US government.

The NTIA letter attaches a September 2013 letter from the Department of Transportation, which states that “the Department questions whether the Commission has the necessary and sufficient information before it to approve the handset proposal at issue in the Public Notice. Again, to the Department’s knowledge, there has not been any robust interagency effort to examine or test LightSquared’s proposal, to probe the underlying assumptions, or to consider feasible alternatives.” The NTIA states that “the agencies are not in complete agreement that the Uplink Assessment has adequately addressed these issues to support a recommendation to NTIA and the FCC” and “NTIA agrees with DOT that the FCC should seek to ensure that LightSquared’s handset proposal is adequately supported by data and a full understanding of the potential impacts on GPS receivers.”

This letter comes in conjunction with the June 20 FCC workshop, which appeared designed to demonstrate that the FCC was seriously investigating whether interference concerns could be resolved, but was structured in a manner that was very supportive of GPS. It also immediately follows LightSquared’s proposal of a new plan for emergence from bankruptcy, which is supposed to be filed with the court on Monday July 14. The NTIA letter means that there is no clear roadmap even to approval of the 20MHz of uplink spectrum that LightSquared assumes is certain to be available, significantly undermining the foundations of the new plan.

More importantly, Falcone’s actions over the last week basically destroy any prospects of further progress with the FCC. While his RICO lawsuit against Ergen and DISH can be largely ignored, the decision to sue the US government and FCC on Friday, is expected to freeze further contacts with the FCC while the lawsuit is in progress.

The likely way forward is now for LightSquared to sue Harbinger in order to prevent the lawsuit going forward, since such lawsuits would normally be regarded as assets of the bankruptcy estate, belonging to LightSquared rather than its shareholders. Harbinger alleges that all negotiations with the FCC prior to the March 2010 takeover were directly with Harbinger’s lawyer (Henry Goldberg), not “LightSquared” (at that time SkyTerra) but it is far from clear that would overcome the presumption that the claims belong to LightSquared.

In any case, the names of the underlying companies changed after the Harbinger acquisition: what is now LightSquared Inc. was at that time Harbinger Global Wireless (HGW), which was the company (represented by Goldberg) that was formally given permission to buy SkyTerra. So even if there was an agreement with HGW (which is doubtful), its claims should now belong to LightSquared Inc. and the bankruptcy estate.

There are several other curious statements in the lawsuit, most notably that the publication of the National Broadband Plan in 2010 was delayed to coincide with the Harbinger acquisition of SkyTerra. Secondly, the amount of Harbinger’s losses was set at $1.9B, but that is far in excess of the amount of investment that Harbinger made in LightSquared after March 2010. Finally, the concept that there was an agreement with Harbinger under which the ATC modifications were granted in exchange for the commitments made as part of the takeover is not part of the formal record: the ATC mods order (which Harbinger claims the FCC has not upheld) is completely separate from the approval of the takeover (which included the Harbinger commitments).

Overall, this marks a significant change in the bankruptcy case: Falcone is on the outside rather than the inside, and now it seems quite likely that the entire new plan will collapse in acrimony. Moreover, the company is on the verge of running out of cash, creating a further crisis in the very near future.

UPDATE (7/15): Yesterday LightSquared’s Special Committee finally recognized the reality of the situation by reaching an agreement with Charlie Ergen to convert his existing debt into a dominant share of the new first lien debt, and obtain an additional $300M first lien loan, replacing JP Morgan in the new capital structure. It was stated that there will be $1.6B of new first lien, with $1.3B from Ergen, and I would assume the remaining $300M will come from Fortress rolling over its first lien debt. Its unclear if Cerberus will also invest in the new second lien tranche, and it certainly seems highly implausible that Harbinger will accept its proposed treatment under the new plan, since this would bar Harbinger from asserting claims against the FCC or Ergen, and therefore the probability of any recovery for Falcone is significantly diminished. It therefore seems highly likely that, as I predicted, the next stage of the bankruptcy case will be litigation between LightSquared and Harbinger, while Ergen just has to sit back and enjoy Phil Falcone’s discomfort.


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.


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.


Understanding the LightSquared bankruptcy ruling…

Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 4:25 pm by timfarrar

Today’s ruling from Judge Chapman on the LightSquared bankruptcy case took four hours to read from the bench, and has not been issued as a formal order, apparently to give the parties involved until to negotiate and find a settlement, before they are ordered to mediation under Judge Drain. However, the oral ruling effectively sets out the parameters for that negotiation, most notably that part of SPSO’s debt is subject to subordination, and though SPSO may be treated differently than other secured debtholders, it may not be discriminated against. Though the judge apparently found Moelis’ valuation more appropriate than that offered by SPSO’s experts, she agreed that it was not valid without FCC approval of LightSquared’s license modification requests.

This appears to be a clear invitation to LightSquared and Harbinger to buy SPSO out of the capital structure if they are prepared to wait around for FCC approval. In that case the main subject of negotiation would be how much is paid to SPSO in respect of its debt, and whether a) that is acceptable to Ergen and b) viable for LightSquared to raise in addition to the amount already contemplated in the reorganization. The judge did not determine a specific amount of Ergen’s $844M in purchases which will be subject to subordination, but did give a range of dates that should be considered: the $320M (face value) in purchases in April 2013 were said to be on DISH’s behalf (and therefore subject to subordination), the $287M bought before October 2012 would not be subordinated and the $238M in purchases between October 2012 and March 2013 might or might not be subordinated.

Moreover, it seems that the extent to which any of these purchases would be subordinated will be dependent on the actual damages caused to LightSquared through the delay in negotiations and increased legal fees associated with the case due to the delays in SPSO closing its trades. As a result it appears only a proportion of the $320M-$558M would actually be subordinated. Given that the time taken to close the bulk of these trades was around 2 months, and LightSquared’s total operating costs including interest are around $1.5M per day, it is quite plausible that the amount actually subordinated could be no more than $100M. This would mean LightSquared having to find as much as $1B (including interest) to buy SPSO out of its capital structure.

Of course, its highly unlikely that Ergen would have been prepared to accept less than the $700M he paid for the debt in the first place, but if the potential damages in the form of subordination are relatively limited, then despite Judge Chapman’s criticism of Ergen’s testimony and behavior, he is still likely to be in a very strong position. Conversely, Phil Falcone will have a much harder time coming up with a plan that will retain value for his equity holdings.

I’m also left wondering about what David Daigle of CapRe, as the biggest single LP debtholder other than Ergen (with $331M in LP debt at face value), will now do, because as Falcone indicated in an email earlier this year “I believe [D]aigle is determined to reduce our position to nothing“. An alliance between CapRe and SPSO to push a debt to equity conversion of the LP debt would probably make it all but impossible for Harbinger to retain value in the reorganization, even if as much as $300M of SPSO’s debt was subject to subordination.

Elimination of Harbinger’s position would be equally unacceptable to Falcone, and thus it seems rather unlikely that agreement will be reached in the next couple of weeks. The best bet would therefore be to assume we will be headed to mediation and yet more DIP financing from the LP holders to extend the process for a couple more months, probably ending up either in an auction with credit bids or directly in a debt-to-equity swap. That presumably means no money for Inmarsat in June. It also implies that the probability of LP debtholders getting paid out in cash with accrued interest anytime soon has also decreased significantly. However, in the medium term it may be better news for GPS, because the debtholders would probably be prepared to drop LightSquared’s current lawsuit against the GPS industry, if it helped their efforts to get the necessary approvals from the FCC.

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