01.13.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 4:53 pm by timfarrar
As I indicated in my post on Thursday last week, the PNT Excom has recommended today, in a letter sent to the NTIA Administrator, that the high precision testing be put on hold, because “there appears to be no practical solutions or mitigations that would permit the LightSquared broadband service, as proposed, to operate in the next few months or years without significantly interfering with GPS”.
This letter confirms that it will be impossible for LightSquared to move forward with its buildout plans in the foreseeable future. However, in the absence of any final decision from the FCC or NTIA, it seems unlikely that LightSquared will change its current course of pursuing approval by all possible means, for as long it has the money to do so. As a result, it may still be many months before this saga reaches a definitive conclusion.
The primary reason for my belief that this will drag on for many months is that Harbinger’s position in LightSquared’s capital structure (subordinate to at least $1.6B of debt) makes it inconceivable that Harbinger would receive any recovery in a bankruptcy situation, and the first lien lenders are unable to stop LightSquared simply continuing to spend the current cash on LightSquared’s balance sheet for as long as it lasts. The only exception would be if a Material Adverse Change (MAC) occurred under the terms of LightSquared’s first lien loan, which could allow the lenders to issue a notice of default before the money is gone. However, it is hard to imagine that a MAC could have occurred solely as a result of an advisory committee’s recommendation and even if a response was to be issued by the NTIA in the near future, it is far from clear that a triggering event would have occurred.
Nevertheless, this news does make it clear that my expectation about the ultimate outcome of a LightSquared bankruptcy (namely that no terrestrial network will ever be deployed) is rather more plausible than the assumptions made by Icahn and other new investors that they could ultimately force through an approval. They must feel pretty upset that LightSquared was assuring them as recently as Tuesday that the technical issues had been solved (despite LightSquared apparently being unable to offer any “practical solutions or mitigations” to the problems identified in the November tests) and that it was only the politics of the situation that were preventing the FCC from approving their network.
UPDATE: This presentation was also posted by NOAA on Friday, giving more details of the November 2011 testing. Apparently these tests did include some high precision devices, which were badly affected by the LS lower 10 signal, even at very low operating power levels. As a result, NOAA conclude that a new filter will be required for these devices, and that is presumably one additional reason why LightSquared’s latest “power on the ground” proposal was not deemed to be a “practical solution”.
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01.11.12
Posted in Financials, Inmarsat, LightSquared, Operators, Regulatory, Spectrum at 3:05 pm by timfarrar
Yesterday, LightSquared held an investor call to provide an update on regulatory progress, including Mr. Falcone’s meeting last week at the FCC (which failed to gain the attention of the FCC Chairman, unlike Mr. Ergen’s visit to the FCC the same day). LightSquared’s investors clearly want to know whether there is any prospect of approval being granted, and a Debtwire story on Jan 3 reported that some of the previous investors have lost confidence in a successful resolution of the issue:
Farallon Capital Management dumped its stake in LightSquared’s USD 1.6bn first lien loan last month as the telecom company and sponsor Harbinger Capital battle regulatory controversies, according to two buyside sources and a source familiar with the matter. Displaying a greater taste for potential distress, Icahn Enterprises has emerged as a recent buyer of LightSquared’s bank debt in the low 40s, the two buyside sources said.
The exit of Farallon signals the loss of one of LightSquared’s former anchor investors. The California hedge fund was one of the biggest par holders in LightSquared’s capital structure, owning more than USD 150m of the Libor+ 1,200 bps term loans the company raised to finance the build out of the its 4G long term evolution (LTE) network, the sources said.
The loans were recently quoted at 43-45 from 90-92 at the beginning of August, according to Markit.
However, I understand that the new investors, including Icahn, haven’t stopped believing that they will be able to overcome the opposition of the GPS community, and ultimately gain approval on the back of (what was described to me as) their greater “sophistication” and financial resources compared to Harbinger. Indeed, part of Mr. Falcone’s objective in his FCC meeting may have been to suggest that the FCC would have to deal with less cooperative owners of the assets in the future, if they delay approval and allow LightSquared to fall into bankruptcy.
Its suprising that anyone could believe that they will succeed where Harbinger has failed, especially as the NTIA now appears determined to spin out the testing process for as long as possible (and almost certainly to beyond the November 2012 election). In addition, it would be easy for the FCC to initiate a (multi-year) rulemaking proceeding on receiver standards for GPS receivers, if they want to kick this issue even further into the long grass. Nevertheless, the implications are that LightSquared’s debt investors are likely to allow the company to keep pushing for approval, rather than trying to force it into bankruptcy more quickly in order to liquidate the assets before all the cash is gone. That would suggest a bankruptcy filing later in the second quarter rather than in the next couple of months.
Ultimately, I think this will look a lot like the Iridium bankruptcy in 1999, where investors thought there was something worth billions of dollars that could be rescued with a bit more money and better execution, and spent nine fruitless months before they finally conceded that $5B of investment needed to be completely written off. The fundamental reason why I think their efforts will fail is that the continuing lease payments to Inmarsat ($115M per year) very likely outweigh the value of 20MHz of L-band spectrum, which at best might be usable terrestrially in 5-10 years time (if approval was even granted).
At this point there is no way that Inmarsat is going to compromise on these lease payments, because the whole LightSquared affair (which Inmarsat enabled through the 2007 Cooperation Agreement) has deeply upset the DoD, which accounts for ~20% of Inmarsat’s total revenues (and probably an even higher proportion of the Global Xpress business plan). Indeed, some within Inmarsat might feel they would give back the money paid to date, if only the whole LightSquared mess could be made to go away. Inmarsat already appears to be telling the DoD that it was not their fault, because they were ordered by the FCC (under a Republican administration) to enter into the Cooperation Agreement, against their better judgment. In that context, Inmarsat’s protests in January 2005 that approval of the ATC plans proposed by LightSquared (then MSV) would lead to substantial degradation of MSS services due to overload interference, now appear very prophetic.
As a result, I expect the end game (which is now unlikely to be reached before 2013) to involve a combination of trying to recover the money paid to Sprint and not spent on deployment, selling the ground spare to Boeing, and agreeing to sell Inmarsat the in-orbit satellite and spectrum assets in exchange for a return of a sizeable proportion of the ~$500M paid to date. Whether that will be sufficient to provide downside protection to buyers of LightSquared’s first lien debt (totalling ~$1.6B) “in the low 40s” remains to be seen.
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01.05.12
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 4:49 pm by timfarrar
Over the last couple of weeks a steady drumbeat of negative reports have emerged about LightSquared, including that it is “running out of cash“, that the National Defense Authorization Act (NDAA) has “stack[ed the] deck against LightSquared” and now that Sprint has put its investment in the partnership with LightSquared “on hold”. Indeed the FCC Chairman reportedly even joked at a December dinner that “LightSquared has two tables…A quick note from the Hilton staff – those of you sitting at the upper table will need to vacate the table, and those of you at the lower table are still too loud.”
However, I’m told that even more damaging information is likely to emerge shortly, indicating that the NTIA’s planned testing of the compatibility of high precision GPS devices with LightSquared’s network has been put on hold. This testing was supposed to take place in the near future (perhaps as soon as this month, although a more realistic timetable was spring 2012). It was reported in December that LightSquared had not yet provided the filters for this testing program and it is unclear whether this is a contributing factor in the decision, or if the NTIA has simply decided that it is not worth expending resources on the testing until the issues revealed in December about the interference with general purpose navigation devices and an aviation terrain avoidance system have been addressed. It seems that the full details should be forthcoming once the NTIA sends its formal report and recommendations from the December 14 meeting to the FCC.
UPDATE (1/6): When FierceWireless asked the NTIA about this blog post, their spokesperson indicated that “federal testing has not yet begun on high-precision devices. We won’t speculate further on timing other than the fact that it would be appropriate for the high-precision testing to take place after the analysis of the location-based/navigation device testing is complete.” This certainly appears to be a change in stance from the September 9 letter from the NTIA to the FCC, which stated “At that time [when LightSquared presents its filtering solution for testing and evaluation], the federal agencies will need to develop and execute a plan to test and analyze LightSquared’s proposed mitigation”, because LightSquared certainly believes it has already “presented” its proposed solution to the Federal agencies for testing and evaluation. Separately, another source has confirmed to me that there is no agreed timeline or funding for the high precision and timing testing, especially given recent cuts in the FAA budget.
As an aside, the Reuters article on LightSquared’s finances appears to broadly confirm my assessment that LightSquared is likely to run out of money by the second quarter of 2012. In view of the net loss of $427M in the first three quarters of 2011, it also seems that my estimate of LightSquared’s cash burn rate is in roughly the right range. However, I’m told by another source that my supposition that LightSquared might not have repaid the Boeing vendor financing is incorrect, and that in fact, as LightSquared has stated, the company has raised “over $2.5B in debt and equity” (at least $150M more than I had estimated), which accounts for this discrepancy. Indeed, with the Boeing loan repayment only being $120M, LightSquared’s cash burn over the last two years must have been even more than I had projected.
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12.14.11
Posted in LightSquared, Operators, Regulatory at 6:02 pm by timfarrar
As scrutiny of the LightSquared and Harbinger situation intensifies, it seems to me that there are more and more questions to be answered. Firstly, will the FCC concede to Sen. Grassley’s request for its communications with LightSquared, to overcome the hold he has placed on the two nominees for vacant Commissioner slots? This certainly seems to be very likely (especially as LightSquared and Harbinger have apparently agreed to produce their communications with the FCC, which I doubt they would have done if they did not believe the FCC would produce these documents anyway). If that is the case, could last night’s unexpected resignation of Chairman Genachowski’s Chief of Staff, Ed Lazarus, have anything to do with what these emails might contain?
A second question relates to what role Jared (Jerry) Abbruzzese, who featured as a witness in the corruption trial of Senator Joseph Bruno back in 2009, has been playing at LightSquared/Harbinger? Bruno (a Republican state senator in New York) was paid consulting fees by Motient, the predecessor of TerreStar, and one time parent company of MSV, which ultimately became LightSquared. The New York Times mentioned Abbruzzese in a 2007 article on President Obama’s 2005 investment in SkyTerra, and a host of allegations related to Abbruzzese’s involvement in Motient/TerreStar and connected companies were made by Highland Capital in 2006. iWatchNews reported in July that “Abbruzzese eventually left the [TerreStar] satellite group”. However, in the White House FOIA email production from November, Abbruzzese turns up being copied on an internal LightSquared email to senior executives and legal counsel in August 2011.
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12.12.11
Posted in LightSquared, Operators, Regulatory, Spectrum at 7:50 am by timfarrar
As I mentioned on Friday, the test results from the draft NTIA report indicated that 75% of cellular and general navigation devices suffer from harmful interference. These are the 400 million “cell phones and auto systems” which LightSquared claimed were “already compatible” with its network, based on the “new plan, which was announced in June”. Now LightSquared claims that the tests did not take into account “a critical element in LightSquared’s mitigation proposal to manage the power from its network that GPS devices will be able to receive”. However, this “power on the ground” proposal was first set out in a presentation to the FCC in early September, and was never part of LightSquared’s June proposal. That was only a day or two before the NTIA mandated this further round of tests, so it is hardly surprising that it was not considered as part of the recent testing.
It is important to note that this phase of testing related to operation solely in the lower 10MHz block of L-band spectrum at LightSquared’s revised operational power limit of 32dBW (exactly as proposed by LightSquared in June). I understand that the test criteria was a limit of 1dB increase in the signal to noise ratio (rather than the 6dB that LightSquared originally proposed but the NTIA refused to accept), with line of sight to the tower. LightSquared’s newer “power on the ground” limits proposed in September do reduce the output power below 32dBW (to as little as 21dBW, i.e. ~15 times less) on the shortest towers (because these will produce the highest interference level close to the tower). However, LightSquared also proposes to increase these power levels by 3dB (i.e. double) in Jan 2015 and another 3dB (double again) in Jan 2017, so that far more towers will be operating at the 32dBW output level tested by the NTIA. Even a tall tower operating at the full power level could have a vehicle passing nearby in line of sight to the main beam, e.g. if the tower is next to an elevated roadway.
All in all, it is certainly true to say that the government conclusions are based on conservative assessments of interference (modest impact on devices in line of sight to a tower operating at the maximum power level). However, this is understandable when general navigation devices are relied on for vehicle safety, including in light aircraft.
As an aside, I found the holiday card pictured above in Target. If you come across it, then do send a copy to Mr. Falcone (450 Park Ave, Floor 30, New York NY 10022) or Mr. Ahuja (LightSquared, 10802 Parkridge Blvd, Reston VA 20191). I’m sure you will find the message inside (“Get lost in the spirit of the season”) to be very appropriate, especially if you add your own punctuation after the second word.
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12.09.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 12:46 pm by timfarrar
Bloomberg now has a copy of the results from the recent NTIA testing that I noted yesterday and is reporting that “LightSquared signals caused harmful interference to majority of GPS receivers tested” and “millions of fielded GPS units are not compatible” with the planned network. The presentation goes on to conclude that “No additional testing is required to confirm harmful interference exists”. This language is particularly important because the FCC Public Notice in September requesting this further testing stated that:
This Public Notice is issued pursuant to the provision of LightSquared Subsidiary LLC’s (LightSquared) conditional Ancillary Terrestrial Component (ATC) authorization that LightSquared may not commence ATC operations until the Commission, in consultation with the National Telecommunications and Information Administration (NTIA), finds that Global Positioning System (GPS) interference concerns have been satisfactorily resolved. Following extensive comments received as a result of the technical working group process required by the International Bureau’s Order and Authorization dated January 26, 2011, the Federal Communications Commission, in consultation with NTIA, has determined that additional targeted testing is needed to ensure that any potential commercial terrestrial services offered by LightSquared will not cause harmful interference to GPS operations.
In other words, assuming this conclusion is endorsed by the NTIA at its meeting next week, the FCC would be perfectly within its rights to deem that no further testing is required to confirm that the conditions of the January 2011 waiver cannot be met and it must be revoked. Not only that, but LightSquared committed in January that “this process must be completed to the FCC’s satisfaction before LightSquared commences offering commercial service pursuant to approval of our requested modification with regard to our L-band MSS frequencies”, so it appears the FCC could potentially prevent LightSquared from offering any terrestrial commercial service at all. Though I suspect LightSquared will try to argue that this commitment is only applicable to service under the waiver, it will be hard to win that point when it was very clear from LightSquared’s discussions with the FCC and White House in January what was intended.
The FCC therefore is now confronted with a tricky decision: does it simply wait for LightSquared to run out of money, so it can try and avoid the inevitable legal action, or does it allow testing to continue, and risk the wrath of Congress (and Sen. Grassley in particular) for appearing to be supportive of LightSquared.
Coming after the SEC issued a Wells Notice to Harbinger Capital this morning, and Harbinger subsequently suspended redemptions from its funds, this news could hardly have come at a worse time.
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12.08.11
Posted in LightSquared, Operators, Regulatory, Spectrum at 4:02 pm by timfarrar
Despite LightSquared’s best efforts to spin the GPS interference issue as “needlessly complex” and turning “basic engineering issues into a political debate”, I’m told that this spin is yet again doomed to fail, once the results of the NTIA tests of cellular and general navigation results are published next week.
These results were described to me as “devastating”, because far from confirming (as most people have assumed) that there is no problem with cellular and general navigation devices if LightSquared limits its operations to the lower part of the L-band, in fact a “good chunk” of these 400 million devices will suffer interference at the 1dB C/No degradation that the NTIA has set out as the maximum acceptable impact level, even if the interference is not as overwhelming as under LightSquared’s original plan.
This comes only a day after LightSquared proclaimed to the FCC that it is “well on its way to demonstrating that GPS interference issues have been resolved”. As a result, it will be interesting to see how LightSquared tries to spin its way out of this problem. Perhaps LightSquared will tell the FCC that it should ignore not only the “subjective views” of the federal agencies but all of their testing as well?
After all, surely we can rely on LightSquared’s own “independent testing” to be more unbiased than those pesky federal agencies? And I’m sure that all of those politicians taking LightSquared’s side yesterday had carefully verified LightSquared’s technical claims before speaking out on the company’s behalf. No wonder our international partners are “absolutely aghast” that we are even having to discuss this “Made in the USA” fiasco.
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12.07.11
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum at 11:49 am by timfarrar
Today LightSquared has been making a big deal about how its “independent tests” have shown that “LightSquared is well on its way to demonstrating that GPS interference issues have been resolved”. This is in line with LightSquared’s statement to the FCC on November 15, that “any determination that the federal precision and timing coexistence issue has been resolved would have to be based on objective and independent test results and not the subjective views of the federal agencies involved”. However, now LightSquared appears to have lost its backing from both the White House and the FCC (and the views of the federal agencies are pretty clear), LightSquared cannot seriously expect the FCC to change the currently defined PNT testing process, and so I think that the only place LightSquared will be trying to argue that point is in the court of public opinion, followed sooner or later by a court of law.
LightSquared also appears to be renewing the tired arguments about how its integrated satellite network can provide coverage everywhere, even quoting the Commissioner of Randolph County, GA who suggested that “this powerful new high-speed network will finally allow them to access broadband wherever they might live or work or travel”. However, LightSquared has never intended to provide terrestrial service in Randolph County, GA, as shown in this chart of planned terrestrial coverage that LightSquared presented at a conference in October 2010.
Even if its deal with Sprint comes to fruition (which now seems unlikely to say the least), LightSquared won’t provide terrestrial coverage there, because Sprint has no towers in Randolph County either.
Thus any potential LightSquared customers in Randolph County will have to rely on satellite coverage. I wonder if they realize that they will get at most 200-300kbps downlink speeds and 10-20kbps uplink speeds from a LightSquared handset? And that they will have to stand outside in an open area and make sure they know which direction the satellite is in? Even more problematically, the total data capacity for all the handsets using the SkyTerra-1 satellite anywhere in the US is roughly equivalent to the capacity of a single LTE base station. And remember that LightSquared’s wholesale partners get 500kbytes of satellite data for every Gbyte of terrestrial capacity that they buy, so they will only be allocating 1Mbyte of satellite data per month for each customer on a standard 2Gbyte terrestrial data plan (if they even sell service to customers who live outside terrestrial coverage).
UPDATE (2/9/12): LightSquared’s satellite capabilities have now been revealed in documents produced by the FCC in response to FOIA requests. The total capacity of each LightSquared satellite is stated to be 100 gigabytes per hour (222Mbps) compared to 2800 terabytes per hour on the terrestrial network (28,000 times more, or in other words the satellite capacity for all users in North America is approximately equal to the capacity of a single base station). Furthermore, LightSquared’s intended wholesale pricing for satellite data (before it was marked up by their partners) was $10 per Mbyte, or 1600 times the price of LightSquared’s terrestrial data services.
Of course I’m sure that none of the endless parade of former politicians that LightSquared has hired has any conception of the technical issues involved, so they will presumably keep touting the company right up to the point at which the money runs out and the lawsuits start flying.
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11.21.11
Posted in LightSquared, Operators, Regulatory, Spectrum at 12:18 pm by timfarrar
Astonishingly, that is actually what LightSquared told the FCC last week in an ex parte meeting where “LightSquared representatives made clear that any determination that the federal precision and timing coexistence issue has been resolved would have to be based on objective and independent test results and not the subjective views of the federal agencies involved”. Of course the entire process hangs on the “views of the federal agencies involved” and if the DoD, FAA, etc. say this can’t happen then it won’t happen.
Clearly LightSquared understands only too well that the entire federal government now views the company about as favorably as an envelope full of anthrax, but can LightSquared seriously intend to argue that its own “independent” testing is good enough and the government shouldn’t bother doing the rounds of additional tests that the PNT Executive Committee is expecting to start in the spring of 2012?
In reality that sounds more like their opening argument in the upcoming litigation (“the FCC ignored the fact that we had tested all these solutions ourselves”) than a realistic way forward, and at this point in time, its hard to imagine LightSquared has anything to lose by waiting much longer to initiate that phase of its strategy.
UPDATE: I understand that the reason for LightSquared’s comment is that they were told by the senior FCC staff in the meeting not to expect a ruling from the FCC anytime soon, because of the need for substantial further testing by the PNT Executive Committee, and there would certainly not be an announcement in December as LightSquared’s CEO was “guaranteeing” only a few weeks ago.
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11.18.11
Posted in LightSquared, Operators, Regulatory, Spectrum at 5:29 pm by timfarrar
The documents released by Citizens for Responsibility and Ethics in Washington (CREW) from the responses to their FOIA request to the White House’s Office of Science and Technology Policy (OSTP), don’t yet provide any smoking guns about the process by which LightSquared was able to get its FCC waiver in January 2011, after applying for it one year ago today. However, the information that is currently online represents only a tiny fraction of the 13,450 responsive documents supplied by OSTP, so it is hard to tell if there is anything more significant still to emerge.
In my view, the most intriguing new document is the January 12 2011 draft of LightSquared’s commitment letter to the FCC, which states that the “industry working group comprised of participants in the telecom and GPS industries…should be lead (sic) by the Commission“, whereas in the final version of the letter this paragraph was removed (and LightSquared was ultimately appointed by the FCC to lead the Technical Working Group). This change seems to have been agreed to by the FCC in exchange for LightSquared stating that “we are willing to accept as a condition on a grant of our request the creation of a process to address interference concerns regarding GPS and, further, that this process must be completed to the FCC’s satisfaction before LightSquared commences offering commercial service”, a commitment which LightSquared’s counsel described as “an investment & customer killer”.
Perhaps more significantly, the documents also provide a very interesting perspective on how views of LightSquared evolved within the FCC, White House and NTIA between mid 2010 and summer 2011. In July 2010, Jim Kohlenberger, Chief of Staff at the OSTP, thought LightSquared’s deal with NSN was “very exciting“, while in September 2010 he kept “hearing great things” about LightSquared. By January 2011 LightSquared’s relationship with the White House was sufficiently close that LightSquared’s counsel was asking “if there’s anything NTIA can do with the press on background to calm the waters” because “Press reports…are leading to big problems with investors, present & potential, customers, Sprint, et al”.
However, as information emerged about the extent of GPS interference, that changed pretty dramatically. In particular, after the submission of the Technical Working Group report in late June, pressure from Sen. Grassley for the FCC to provide documents meant “things [were] heating up” and by early August it was clear that LightSquared would be experiencing “headwinds” because the FCC Chairman was about to throw LightSquared under the bus, with his announcement on August 9 that he would not permit LightSquared to operate until interference concerns were resolved. By August 16, even the NTIA Administrator was indicating that any suggestion by LightSquared that they discuss how to move forward meant that “LightSquared is in Wonderland” (ironically a comparison that I also remarked on). Then in mid September, it became clear, after the FCC’s Public Notice mandated further testing, that everyone in government (and apparently the FCC) would “distance” themselves (exactly as I predicted), telling a Harbinger representative that “I must ask that you stop communicating with me regarding the LightSquared matter.”
Once this timeline and the current attitude of key people in government is understood, it becomes evident how truly dire LightSquared’s prospects are. Simply put, there is now no chance whatsoever that there will be any positive ruling from the FCC (or even an end to the testing, which can be prolonged almost indefinitely if the government insists on testing LightSquared devices as well – indeed the FAA presented a timeline yesterday with potentially multiple stages of further testing, including handsets, beginning in the Spring of 2012), and it is simply a question of wondering when the money all runs out.
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