08.23.10

What is TerreStar’s satellite spectrum worth?

Posted in Financials, Handheld, ICO/DBSD, LightSquared, Operators, Regulatory, Services, Spectrum, TerreStar at 12:09 pm by timfarrar

That’s the big question facing TerreStar and its investors, as the company moves towards a bankruptcy filing which we assume will come in the next week or so. TerreStar Networks has a very substantial amount of debt secured against its in-orbit satellite and 2GHz spectrum assets, with $857M of 15% Secured Notes and $109M of 6.5% Exchangeable Notes outstanding at June 30, 2010 according to TerreStar’s latest 10-Q.

TerreStar stated in the 10-Q that it had “commenced restructuring discussions with certain holders of our 15% Secured Notes and 6.5% Exchangeable Notes”. However, if these discussions are not successful, and TerreStar and its advisers want to argue that the satellite spectrum is worth considerably more than the outstanding first lien debt, then it is possible that they could try to keep this debt in place and raise DIP funding based on TerreStar’s other assets, such as its 1.4GHz spectrum and the ground spare satellite (which is encumbered by a separate $73M Purchase Money Credit Facility).

The result would likely be a dispute in bankruptcy court over whether it is better to halt TerreStar’s plans to launch commercial service, and sell off its satellite and spectrum assets in the near future (e.g. if the current FCC proceeding permits incentive auctions for the 2GHz MSS spectrum), or to keep the company afloat and moving forward with the launch of the Genus phone, which was recently postponed until September. Of course the second option would require considerably more funding to be made available, and it is extremely questionable whether a feasible business plan could be developed to justify commercial launch of the Genus phone. In our profile of TerreStar, published back in January 2010, we estimated that the handheld Genus phone could generate perhaps $25M in wholesale service revenues by 2014, but after trying out the phone in March, we scaled back our expectations.

It may also be difficult to argue that TerreStar’s in-orbit satellite and spectrum is worth significantly in excess of the $966M of outstanding Secured and Exchangeable Notes, when a judge found in the DBSD bankruptcy case last fall that DBSD (with a satellite in orbit and having chosen its 20MHz of spectrum ahead of TerreStar) should be valued at $492M to $692M.

It is far from clear that either DBSD or TerreStar are better positioned than they were last year to secure a strategic partner (such as a wireless operator) who is prepared to fund the rollout of a multi-billion dollar terrestrial ATC network. Indeed, given the recent decision of Harbinger to go it alone with a wholesale approach for LightSquared, major wireless operators have to date proved unwilling to invest on the basis of the ATC model and associated satellite spectrum (despite five years of trying on the part of SkyTerra, ICO/DBSD and TerreStar).

The FCC’s recent NPRM could potentially enable the 2GHz MSS operators to monetize their spectrum via an incentive auction or similar mechanism once the proceeding is completed in 2011, which does represent a change from last year, but the FCC has also emphasized that it will need to receive compensation for the step-up in value accruing from removal of the current ATC rules in the 2GHz MSS band. If the proceeds of an incentive auction were shared 50/50 between the current spectrum holders and the government, as appears plausible, then (taking into account the delay before an auction could take place, most likely in 2012, and the need for additional funding in the interim) such an auction would need to raise close to $0.50 per MHzPOP in order to repay the Secured and Exchangeable Notes.

Although such a valuation is similar to those mooted by Clearwire and Credit Suisse in recent months, the FCC’s interests are not necessarily supportive of increasing spectrum valuations, and the balance between potential buyers and sellers of spectrum is significantly different to that back in 2006, when the AWS auction raised an average of $0.54 per MHzPOP.

5 Comments »

  1. ORBITRAX said,

    August 24, 2010 at 9:43 am

    As far as the 1.4Ghz spectrum goes, it is tied up in a multi-decade lease agreement which provides Harbinger with a ‘Right of First Refusal”, and still has ~23 million in pre-paid payments on balance.

    The US regulatory assets based on the 2.0Ghz MSS spectrum are likewise tied up in a decade long, 40 million pre-paid Satellite Minutes Agreement. In order to disaggregate the satellite from the US spectrum assignments would likely require consent from Skyterra LP/Harbinger.

    Any other entity looking to provide DIP and a competing Plan of Reorganization had better be prepared to provide Skyterra/Harbinger with at least a decade of US based Satellite Airtime Service from Terrestar-1. (Which would delay any incentive auction for at least 10 years, combined with a requirement and costs to actually provide Operational Service).

    Harbinger appears to have hedged their position well in regards to Terrestar. Most of Terrestars assets are now under decade or multi-decade pre-paid contractual agreements.

    ORBITRAX

  2. timfarrar said,

    August 24, 2010 at 10:14 am

    Typically in bankruptcy, the debtor can decide to reject or affirm existing lease contracts, without the consent of the other party (which is different from incurring secured debt). If a contract is rejected then the other party is left with a claim against the bankruptcy estate.

    Such a decision would be based on whether the existing contract is compatible with the debtors’ new business plan and whether a better deal is on offer. It might conceivably be argued that no better deal would be forthcoming for the 1.4GHz spectrum, but if a decision is made to change the satellite business plan then it is hard to imagine that continuing with the Satellite Minutes Agreement would be in the interests of the debtor (indeed even if the Genus launch did go ahead there would be no reason to provide $40M of non-revenue generating services after emergence from bankruptcy).

  3. ORBITRAX said,

    August 24, 2010 at 11:57 am

    Harbinger controls the BOD, and will provide the DIP. I would expect a request for “Emergency DIP” in First Day Motions. I would suggest an Examiner for the estate. JMO.

    ORBITRAX

  4. waveslammer1 said,

    August 25, 2010 at 4:46 am

    Nothing has officially been said about any change to the BOD.
    According to the Terrestar website, everyone on the board has been there for years.
    I may be wrong but when a board of a publicly traded company is changed I believe it has to be an official release of information.

    I will admit I am surprised that it has not happened.
    I assumed that as part of other agreements Harbinger agreed not to take over the board at that time. ie Satelite minutes, etc.

    wave

  5. timfarrar said,

    August 25, 2010 at 8:36 am

    There has been one change to the TerreStar board this year, when Echostar’s representatives resigned in January (http://tmfassociates.com/blog/2010/01/05/interesting-times-for-terrestar/)

Leave a Comment

You must be logged in to post a comment.