04.20.12

Decisions, decisions…

Posted in Financials, Inmarsat, LightSquared, Operators, Spectrum at 9:33 am by timfarrar

The news this morning that LightSquared has made the $56.25M payment to Inmarsat that was due in February and in exchange gained two years “breathing space” before any additional payments need to be made, is in line with the deal that I noted was on the table two weeks ago, and shows that Harbinger is still attaching importance to its spectrum rights under the agreement with Inmarsat as it tries to argue for a “spectrum swap”. In a way the $56.25M paid today may not be that important in the end, because if LightSquared files for bankruptcy within the next 90 days then that amount could probably be reclaimed by LightSquared’s creditors.

However, far more significant is that LightSquared has also given up all claims that Inmarsat had failed to perform its obligations under Phase 1 of the Cooperation Agreement (despite the fact that Inmarsat failed to retrofit any of its terminals with filters) and as a result Inmarsat is now saying there is “a high degree of confidence” that it will be able to recognize a further $325M. I’m informed that LightSquared had told its investors that there was “no good basis” to challenge Inmarsat’s assertion that it wasn’t actually necessary to fit filters, and it certainly appears that Inmarsat now has no intention of doing so, and instead will simply be able to recognize a further $325M (on top of the $154M recognized to date) out of the $490M paid by LightSquared up until the end of 2011 as pure profit.

Why did LightSquared make this payment, rather than filing for bankruptcy and preserving its right to sue Inmarsat for part of the money back? One explanation certainly appears to be Falcone’s continued delusional view that LightSquared’s problems can be overcome, and this fits right in with the decision back in December to give up $236M to Sprint in exchange for preserving their hosting agreement for a further three months.

More intriguing is whether this development could signal an agreement with Carl Icahn is going to be reached before April 30, which would keep LightSquared out of bankruptcy, as Falcone apparently desires, perhaps in exchange for Harbinger selling its Ferrous Resources shares to Icahn at what seems to be quite a low price. On the other hand, Falcone might simply be trying once again to convince LightSquared’s investors that he is the only person who can strike the deals necessary to keep LightSquared alive, and its also worth noting that Harbinger still needs to raise $47M from the sale of assets by April 30, regardless of whether a deal is reached over LightSquared (so that the Ferrous Resources sale has to happen anyway).

What this may therefore point to is a finely balanced situation where it remains unclear whether Icahn and his allies have sufficient votes to call a default on LightSquared’s debt after April 30. In particular it is not clear whether they would need to secure 50% support to call this default or as much as a two-thirds majority, which could be far more difficult. Today’s actions may or may not persuade some debtholders to support Falcone rather than Icahn, but as we saw with the Sprint deal, the potential recovery for LightSquared’s investors in the absence of a spectrum swap is rapidly vanishing, with only the ground spare satellite providing any reasonably monetizable asset, and a major part of the ($200M?) cash on LightSquared’s balance sheet will ultimately be consumed by bankruptcy costs.

Its therefore particularly hard to understand why the LightSquared debt has been consistently trading higher, to as much as 53-55 cents on the dollar this morning. The only way to rationalize the rising price of the LightSquared debt is that other investors think that because someone as smart as Icahn is getting involved, there must be a good opportunity here. However, as we saw a decade ago with Craig McCaw’s interest in Iridium and ICO, which ultimately resulted in him taking a huge loss, the satellite industry has a history of disappointing smart investors. With Andy Beal knowing only too well this industry’s cycle of “hopeful and ambitious birth, thrilling and painful growth, and an early and tragic death”, maybe he’s really the smart one to get out at this point. After all, as the Dallas Observer’s epitaph for Beal Aerospace pointed out: “I guess it’s hard to be a genius”.

UPDATE (4/23): LightSquared’s debt has traded even higher, as investors apparently believ a near term bankruptcy is becoming less likely. It seems like a consensus is emerging that Icahn will not have the votes to force a bankruptcy at the end of the month, and so a relatively lengthy extension may well be granted on the breach of covenant waiver, potentially through the end of this year. Even after making the payment to Inmarsat on Friday, LightSquared should have enough money to make its cash interest payments in July and October (totaling ~$50M), cover the operating costs of the current business and still have perhaps $50M-$100M of cash left at the end of 2012. I also understand that LightSquared has asserted that a spectrum swap should be forthcoming after the November 2012 election, although their recent track record of predicting favorable FCC actions is hardly encouraging for investors. However, as noted above, in the absence of a spectrum swap, the potential recovery for investors at that point will be even less, and it will be interesting to see whether Boeing still wants to buy the ground spare satellite next year, given that construction of the MEXSAT-2 satellite for the Mexican government will start relatively soon (the MEXSAT-1 satellite is scheduled for launch in 2013 or 2014).

UPDATE (4/27): The Wall St Journal is reporting today that LightSquared’s lenders are insisting that Falcone step aside as a condition for agreeing not to call a default on Monday. It appears a deal might be possible to keep the company out of bankruptcy for a substantial period of time, perhaps by substantially diluting Falcone’s equity stake, and thereby avoiding the complications (e.g. FCC license transfers) and expense that would be involved in a bankruptcy case. However, it is far from clear that Falcone will do the logical thing and step aside at this point. After all, when I’ve been wrong in my predictions about how things will go, its usually because I’ve assumed that Falcone and LightSquared will act rationally in the interests of their investors.

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