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.
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.
Today hasn’t been a great day for the MSS industry, with Kerrisdale Capital mounting an attack on Globalstar, and LightSquared’s bankruptcy process descending further into chaos, with Judge Chapman ordering the stakeholders back to mediation after the standalone reorganization proposal for LightSquared LP was withdrawn and the Special Committee threw up its hands in despair.
Fundamentally this debate comes down to whether investors (and more importantly potential spectrum buyers such as cellular operators) believe there is a shortage of spectrum, which will justify a higher valuation for spectrum assets. An answer to that broader question should become a lot clearer after the AWS-3 auction next month, as Charlie Ergen has been at pains to point out. After all, DISH has declared its intent to bid, apparently in order to push up the final price that others pay.
Some clearly believe, like Macquarie who published a report last week claiming that the AWS-3 spectrum will sell for $1.30 to $1.50 per MHzPOP, and DISH’s spectrum could be worth more than their current estimate of $1.75 per MHzPOP. However, the FCC is less sanguine and has set a relatively high reserve price (sufficient to meet the $7B required to fund First Net) in the expectation that bidding may not be very aggressive. Chairman Wheeler is also clearly nervous about the incentive auction, warning cellular operators at CTIA last month that:
Many broadcasters have been led to believe that the demand for mobile spectrum really isn’t as your industry has claimed.
As a result, they believe that wireless carriers won’t fully participate in the auction. Whether or not wireless carriers show up with sufficient demand to incent broadcasters to participate is something only you control.
But, if that is the case, if mobile operators don’t put their money where their mouths have been, the future of spectrum policy will begin to look a lot different.
Remember that Greenhill has just estimated that bids in the incentive auction could total $45B (of which $33B would be paid to broadcasters), even at what some would consider the relatively modest price for low frequency spectrum of $1.50 per MHzPOP. The price for AWS-3 should be rather lower than that, and to me it would not be at all surprising to see the final auction receipts total less than $15B ($0.80-$0.90/MHzPOP).
Even that total, of up to $60B, may prove a significant burden for cellular operators now that AT&T and Verizon are loaded with debt after their purchases of DirecTV and the Vodafone stake respectively and have much less incentive to bid the price up aggressively (especially in the incentive auction, since spectrum will potentially be reserved for smaller players).
Perhaps there will be an external savior in the form of a new entrant? That’s what one Globalstar bull, Odeon Capital, apparently believes, suggesting today that “Today, carriers and cable companies provide access, you need them to use wifi. Ultimately, TLPS provides an end run around the traditional gatekeepers, and we think that’s a very compelling incentive.”
However, its important to note that Google looked at buying both Globalstar and Inmarsat in late 2012/early 2013 (at a time when Globalstar’s share price was a lot lower) for Project Loon, but that proposal was rejected by Larry Page (note that the companies are not named, but Astro Teller specifically stated that there were six months of negotiations with “large companies” to buy “a relatively thin piece of harmonized spectrum” and its been confirmed to me by multiple independent sources that the targets were Globalstar and Inmarsat).
Amazon is another mooted investor in wireless spectrum, and a prospective Globalstar partner, but now that its Fire phone has failed to set the world alight, it seems increasingly unlikely to spend billions of dollars on spectrum.
So if its hard to see a new entrant saving the day, what will happen to spectrum values? It certainly doesn’t mean that Globalstar or LightSquared’s spectrum is worth nothing, but does suggest that (as I’ve long predicted) the spectrum bubble may soon start to deflate. The bands that will likely feel the pressure first are those without an existing ecosystem (or that are not owned by large operators like Verizon and AT&T with the power to create one).
On the other hand, unless you can find someone to pay for and use your spectrum, how do you monetize it? Do you build out your own network, like Clearwire and LightSquared tried to do? Or do you just sit and wait for conditions to improve? It certainly seems plausible that a number of spectrum owners, including DISH, may now have to choose between these two, relatively unpalatable, options.
So the latest LightSquared bankruptcy plan has finally been filed, in advance of a status conference planned for Monday. Though the plan provides alternative options depending on whether Ergen’s SPSO decides to support it, the plan grants SPSO an allowed claim of $900M (for an original investment of $700M) if it votes in favor. That’s less than the $1B allowed claim indicated back in July, suggesting that quite a bit has changed structurally in the last month in order to come up with a simple plan that should be approved by the judge. However, it shouldn’t be assumed that SPSO will object to this change, as the $100M decrease in SPSO’s allowed claim may be part of a deal under which Fortress drops the prospect of recovery on its LP Preferred Shares.
Under the new plan, the non-SPSO secured debtholders plus SPSO and MAST (which holds $300M+ of LightSquared Inc. loans) will now only receive a pro rata share of LightSquared’s new $1B Term Loan plus the equity in the company. In other words the $1B Term Loan will cover less than half of the allowed $2.3B-$2.4B in secured debt and interest, suggesting a preference for the company to be rather less indebted than previously planned. The debtholders (including potentially SPSO) will also back a new $500M working capital facility and SPSO will remain a non-voting participant in the capital structure.
This structure seems designed to ensure that the plan is easy for the judge to approve and Falcone is cut out, unless he can find the money to participate in an auction, where the minimum bid must be sufficient to pay the allowed claims in full in cash minus the new $1B Term Loan (though that and the working capital facility would also need to be refinanced). In other words, if Phil Falcone wants to retain control of LightSquared (or if anyone else wants to bid), then he would need to find $1.4B+ in cash plus a $1.5B debt facility just to participate in the auction. If there isn’t an auction, then Harbinger receives nothing whatsoever, even for its Inc. subordinated debt (Class 7), let alone its equity.
Moreover, the plan sets out as one condition that the plan proponents shall “promptly commence and prosecute a Harbinger Litigation Action” to “stay, bar, enjoin, preclude, or otherwise limit Harbinger and/or any of its Affiliates from asserting against the GPS Industry and/or the United States of America any claim or cause of action that is or directly affects any property of one or more of the Debtors’ Estates”. Prior to the Effective Date of the Plan, the company must have received a ruling from the bankruptcy court which grants this request.
As a result, there’s little reason for Phil to agree to any of this, and the prospect of Harbinger raising nearly $3B to participate in the auction seems pretty remote. However, if Harbinger doesn’t agree to the plan then it won’t receive any of the releases granted to other parties (including Ergen, if SPSO votes in favor of the plan). So any LightSquared investors who’ve lost money would potentially then follow the strategy set out by SPSO earlier this year and sue Falcone personally. In fact, even if Harbinger continues to sue the US government for its own losses (if it is even possible to separate those from claims that would belong to LightSquared itself) then LightSquared investors could seek to claim any proceeds from that effort.
Now we have to see whether Ergen (or perhaps EchoStar or even DISH) wants to bid for all of LightSquared (which seems unlikely assuming he agrees with the current plan), or whether Falcone is able to find backers to participate. It seems less likely that the other Ad Hoc debtholders would bid in the auction, because those existing debtholders that do want to exit (presumably including MAST) can and probably will sell their claims to the holders like Fortress who want to remain in the capital structure. Given the implausibility of anyone backing Harbinger with $3B of new money to refinance LightSquared while Falcone is suing the FCC, undoubtedly there will be plenty of fireworks over the next few weeks as Phil seeks to avoid what looks like his inevitable doom.
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.
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 ¶32 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.
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.
Yesterday, Harbinger’s new lawyers at Cooper & Kirk, filed an ex parte with the FCC, documenting a meeting last Friday with FCC staff, plus two representatives of the DoJ (who would presumably defend the FCC in the event of a lawsuit), including Alicia Simmons who signed the devastating Jan 17 filing in LightSquared’s bankruptcy case. The FCC personnel included Associate General Counsel Jennifer Tatel and the letter also identified Hillary Burchuk as an FCC staffer, although she is in fact apparently a DoJ trial attorney. Interestingly, Cooper & Kirk has never filed an ex parte with the FCC in the past, and Harbinger has previously been represented at the FCC for many years by its regulatory law firm, Goldberg, Godles, Wiener and Wright.
It seems pretty clear that the purpose of the meeting was to threaten to sue the FCC, not least because Cooper & Kirk’s own website boasts that according to Legal Times, it is “The top choice for plaintiffs who want to sue the federal government.” This may be Falcone’s last effort to avoid being excluded from the resolution of LightSquared’s bankruptcy case, where (as I concluded) Judge Chapman’s decision to reject the LightSquared bankruptcy plan has made it far more difficult for Harbinger to maintain a stake in the reorganized company.
If Harbinger is excluded from the reorganization, then it would not benefit financially from the increase in spectrum value resulting from a future FCC approval (or indeed any proceeds from the litigation against the GPS industry). As a result, if that happens Harbinger is threatening to sue on its own account, because litigation would likely block any possibility of progress at the FCC, and Harbinger would not have any incentive to drop that litigation as part of a settlement which resulted in an FCC approval. Thus Falcone is basically offering the threat of mutually assured destruction to persuade the other LightSquared debtholders to give him a share of the reorganized company, exactly as his earlier emails suggested: “if I don’t like the result, maybe I’ll just sue the FCC and tie this up for 10 years.”
On Tuesday the LightSquared stakeholders were ordered to mediation, as expected, although reportedly some progress had been made on a “global restructuring” deal. That phrasing would suggest the aim is to keep the 1670-75MHz spectrum together with the L-band MSS spectrum, rather than auctioning the two pieces of spectrum separately, perhaps with the holders of the 1670-75MHz secured debt being paid off via a new injection of capital. If that deal comes to fruition it would suggest that the target would still be to gain access to the NOAA 1675-1680MHz spectrum, in which case it might also make sense to keep Ergen in the capital structure (in order to avoid the threat that DISH or EchoStar might bid against LightSquared in an auction). But its harder to see what bone might be thrown to Falcone to prevent Harbinger from filing suit against the FCC.
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.
Back in 2009, only a year before it embarked on the original $1.2B and now $1.6B Global Xpress Ka-band project (this new figure implicitly includes the launch of the fourth I5 satellite), Inmarsat’s CEO was happy to tell investors that “We are going into a period of capex holiday”. So perhaps it was inevitable that earlier this month at Inmarsat’s Q4 results presentation, some analysts were worried about the “risk that CapEx in 2015 won’t come down by the $300M figure you’ve mentioned”.
It does seem they were right to be concerned, because its now being reported (and I’ve confirmed) that Inmarsat and Arabsat are negotiating the inclusion of an S-band payload on Hellas Sat 3, similar to the Solaris piggyback payload on Eutelsat W2A.
I’m told that Inmarsat is now actively applying for national licenses to preserve its rights to 2x15MHz of S-band spectrum in Europe, after turning down an offer from Charlie Ergen to buy the license from them (in fact Ergen met with Rupert Pearce, Inmarsat’s CEO, in Washington DC this week). Inmarsat was previously exploring the development of an Air-To-Ground (ATG) network using this spectrum in Europe, but that has been abandoned, because it proved impossible to resolve the regulatory issues in the short timeframe available before the license deadlines (for a satellite launch) expire.
The new S-band business plan is instead directed at “smaller, cheaper terminals” for traditional MSS services (an opportunity that Inmarsat’s CEO highlighted on the MSS CEO panel that I moderated at Satellite 2014) rather than terrestrial exploitation of the spectrum. Another potential reason for Inmarsat’s move is that Thuraya will be trying to secure backing for a replacement L-band satellite over the next year, and by teaming up with Arabsat, Inmarsat could look to undermine Thuraya’s pitch that having an MSS satellite from the Middle East is a matter of regional pride.
In fact, Inmarsat was very firm at the conference that MSS spectrum should not be reallocated for terrestrial use, and even described the LightSquared Cooperation Agreement as something they were “forced” into (implicitly by the FCC), with Inmarsat’s preoccupation being to protect their MSS users from interference. This was quite a striking signal that Inmarsat may not be very supportive of compromise with LightSquared, which is a condition of the current bankruptcy exit plan.
In particular, Inmarsat is sitting on about $260M of deferred revenues, which were paid by LightSquared prior to the bankruptcy, to pay Inmarsat for fitting filters to its existing terminals (as I’ve noted before Inmarsat concluded this wasn’t actually required, so they kept the money). If Global Xpress revenues don’t ramp-up as quickly as expected (and there is now a high likelihood that the third I5 satellite will not be launched this year, since its not even on the latest Russian schedule and the second satellite is currently listed as launching in September), then the easiest way for Inmarsat to meet the 8%-12% wholesale revenue CAGR from 2014-16 that it reiterated on the Q4 results (which requires an increase of $200M to $300M in absolute terms) would be to book most if not all of those deferred revenues in 2016.
Of course, that is actually supportive of Ergen’s original proposal to just use the LightSquared uplink spectrum, because filters would only be required if the downlink band is actually used for terrestrial services. On the other hand, because Inmarsat would want to book the deferred revenues in 2016, rather than 2014 or 2015 when the bankruptcy process is complete, it seems plausible that Inmarsat would agree to an additional two year deferral of most payments from April 2014 to early 2016, aligned with the assumptions in LightSquared’s latest plan that FCC approval would be received by the end of 2015 and that their new funding would last through the first quarter of 2016.
At that point, if LightSquared has made no progress with the downlink band and is forced to fall back on uplink only use of the MSS spectrum, Inmarsat could book the deferred revenues and potentially could even get some additional payments for leasing the uplink spectrum at a later date. Don’t forget that Ergen might still be on the scene as well, since the deadline for completion of what will now likely be two competing European S-band projects is also in the first half of 2016.
So now we move to the key hearings next week in the LightSquared bankruptcy case, which will address the adversary proceeding against Ergen and LightSquared’s plan for emergence. As I’ve noted previously, despite the evidence LightSquared has marshaled about Ergen’s strategic objectives for his investments, it would be a major step for the judge to allow LightSquared to put Ergen/SPSO in a class of his own, then designate his vote and give him a third lien note with no exit for 7 years (and potentially no value in the absence of FCC approval). However, no one seems clear about what the judge will do, and what any compromise ruling might entail.
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