In yesterday’s Wall St Journal article about lenders “turning up the heat” on Phil Falcone (which surprisingly failed to mention whether he is sweating or not) it was intriguing to note that the article was changed during the day by the removal of one critical sentence. Specifically the version of the article as it was original published on Friday morning and then updated on Friday afternoon (at 3.28pm ET) contained the following paragraph:
The lenders believe Mr. Falcone has become a lightning rod that has made dealing with Washington regulators too difficult and threatens to upend the company’s chances of success, the people said. The lenders believe there are signals coming from Washington that show a willingness to engage in dialogue over LightSquared’s woes, but that Mr. Falcone’s presence could impede progress, one of the people said.
However, in the final version of the article (from 6.41pm ET and as published in today’s paper), this paragraph was simplified to:
LightSquared needs the regulators’ blessing for its nationwide mobile broadband network to succeed. The lenders believe Mr. Falcone has become a lightning rod who has made dealing with regulators more difficult, the people said.
This change might be taken to imply that there is some sensitivity on the part of the first lien lenders to even the vaguest hint that their billions of dollars could now succeed in securing a spectrum swap, when Falcone no longer has the billions to achieve that goal. After all, as I noted back in January 2011 and has been clear from the number of lobbyists hired by the company, LightSquared certainly felt that it was necessary to throw a great deal of money around in order to gain approval for its network.
One of the counter arguments coming from Harbinger is that “they doubt Icahn will get better results from DC” especially if (as Falcone claims) the debtholders are only interested in a “quick flip”. More importantly, I suspect that (as the change in the WSJ article suggests) after all that has happened in the last year, the FCC, White House and Congress will all now be extremely sensitive to any inference that money can buy LightSquared some love in DC, whether we have a Democratic or Republican administration after the election in November.
UPDATE (4/30): Last night the WSJ reported that Falcone has agreed to step aside “eventually” in exchange for a one week extension of the waiver of LightSquared’s debt covenant violations. This will allow negotiations on an extension of the waiver for 18-24 months, conditional on Harbinger agreeing to substantial dilution of its equity stake. The WSJ article suggests that debtholders do not want LightSquared to file for bankruptcy, because that would potentially allow Harbinger to maintain control.
However, it seems that the more plausible concerns relate to the assumption by both sides that any spectrum swap would come relatively soon after the November presidential election, and so by tying up the company in bankruptcy, Harbinger could preserve the chance of a recovery for its equity for much longer. This would be similar to DBSD, which originally planned to hand over the company to its second lien debtholders when it filed for bankruptcy in May 2009, but after a very prolonged stay in bankruptcy (due to Sprint and DISH’s appeals of the reorganization plan), eventually sold the assets to DISH in an auction in early 2011, paying off the second lien debt at par and providing a recovery for the equity holders (ICO Global).
We therefore still have to see if Falcone will be prepared during this week’s negotiations to countenance an immediate substantial dilution of Harbinger’s equity as a condition for avoiding bankruptcy. Clearly such an action would lock in a significant loss to Harbinger, as opposed to preserving all of the equity upside in a bankruptcy situation. Conversely, a bankruptcy filing would run the risk of Harbinger losing everything, if the debtholders can persuade the judge that the assets available simply do not justify contemplating a recovery for LightSquared’s equity holders. As a result, at the end of this week there could well be a significant gap between the equity dilution Harbinger would accept (perhaps less than 50%?) and that demanded by the debtholders (80%+?). In those circumstances, a bankruptcy filing and valuation fight might be the only remaining option for both sides.
Separate articles published yesterday by The Daily Beast and Bloomberg had plenty to say about Phil Falcone’s “deep perspiration stains” and his claim that “he doesn’t sweat” under pressure. However, with the waiver of the covenant breaches on LightSquared’s first lien debt expiring on April 30, the heat is certainly on him to figure out the way forward.
Bloomberg’s article indicates that Falcone is hoping Carl Icahn “might become a partner”, as he searches for a way to keep LightSquared out of bankruptcy. In that context it is interesting to note that news emerged last week that Icahn is nearing a deal to buy a 14.9% stake in Ferrous Resources, a Brazilian iron ore mining company, from Harbinger at a price of $1.50 per share, one third of what Harbinger paid for shares in the company in 2009 and less than half of the valuation put on these shares by Harbinger in January 2012. At least conceivably, such a deal could provide a quid pro quo for Icahn’s support in keeping LightSquared out of bankruptcy, and it is notable that Harbinger also needs to raise $47.5M from this asset sale to repay its own loan (from Jefferies) by April 30, the same day that the LightSquared covenant waiver expires.
Two weeks ago I thought that the April 20 deadline (this coming Friday), when Inmarsat can terminate its Cooperation Agreement with LightSquared, could provide the impetus for a decision on whether or not to file for bankruptcy sometime this week. However, if the future of Harbinger itself is riding on avoiding a potential default on the Jefferies loan, then the Inmarsat deadline might well now be ignored. Inmarsat has been standing firm on its insistence that it must be paid even more money to contemplate any extension of the Cooperation Agreement, so if the April 20 deadline passes without payment being made, then it is hard to see an outcome where Inmarsat doesn’t just terminate the Agreement for default, and reclaim several additional MHz of spectrum from LightSquared as part of these default conditions. In those circumstances, it would become even harder for LightSquared’s successors to ever deploy a terrestrial network in the L-band MSS spectrum, even if the FCC was to mandate GPS receiver standards at some point in the future.
As a result, we may soon be asking what is actually left for LightSquared’s creditors, in the absence of any agreement with Inmarsat or Sprint, other than a ground spare satellite (which at least originally was worth $120M to Boeing, based on their vendor financing agreement) and an in-orbit satellite (which is probably worth very little, given its negative cashflows). Of course, LightSquared will try and sue the government, but that may now be made much harder by the statements of DirecTV’s CEO, who told Bloomberg that they “looked at LightSquared’s spectrum in 2004″ and concluded “It conflicts with GPS, it will never work”. DirecTV’s CEO may be misremembering the events, because Rupert Murdoch (then owner of DirecTV) was telling the Wall St Journal in November 2005 that “We may be forming a company with partners to build something out here that would give you broadband” and I had understood that these discussions were in 2005 (possibly even into early 2006) and broke down mainly over price.
Nevertheless, even Falcone admitted that in 2010 he “knew there were interference issues [but] they weren’t his to solve because GPS users were encroaching on his spectrum”. If that is the case then wouldn’t it have been rather better to tell the GPS community about the problem years ago, rather than try to spring it on them as a fait accompli at the last minute? It seems that as DirecTV’s CEO put it “Falcone ‘made a bet that the government would say, “Sure, go ahead,” or somehow make it right.’”.
Of course the complaints of Harbinger’s own investors will be significantly boosted by Falcone’s admission, and LightSquared’s investors may well suggest that UBS ought to have enquired more deeply into this issue before selling the first lien debt. However, for the moment, both Falcone and LightSquared’s debt investors appear to be more focused on securing a spectrum swap, which as Walt Piecyk says in the Bloomberg article (and as I’ve said many times before) “isn’t a realistic option [because] there’s nothing readily available and…if there was, that’s spectrum that could be auctioned off for billions in proceeds”.
Indeed the news today that the FCC has appointed Gary Epstein, a former SkyTerra executive, as co-head of the Incentive Auction Task Force (something which has already attracted Sen. Grassley’s attention) may make it even harder for the FCC to take any action to help LightSquared, because further accusations of favoritism would be sure to follow.
“Every two and a half years, every spectrum crisis has gotten solved, and that’s going to keep happening,” Mr. Cooper said. “We already know today what the solutions are for the next 50 years.”
In fact, the CTIA’s semi-annual statistics, released last week, gave a pretty clear indication of what those solutions are. Remarkably, in the last six months of 2011, an all-time record 26,465 cell sites were added in the US (an increase of more than 10% in just 6 months) despite the fact that wireless capital investment by the carriers during 2011 was up only 1.7% on 2010. Thus it seems pretty clear that deployment of new (small, lower cost?) cell sites for capacity enhancement is working very well to accommodate increasing amounts of data traffic, without imposing any significant burden on the wireless operators. Indeed, with the operators apparently able to include on-net WiFi traffic in the data they report to CTIA, as AT&T is probably doing, the need for more licensed spectrum may be reduced even further. As a result, if LightSquared’s investors ever believed Mr. Falcone’s assertion that “it is clear that the investment thesis was dead-on” then maybe they ought to start having some doubts about that as well.
Mr. Falcone has responded by suggesting that he is “seriously considering” a “voluntary bankruptcy” as “one of several options” for the company. More pointedly, yesterday he indicated (in a very explicit reference to Icahn) that this would be an attempt to “protect the company from creditors who are more interested in a quick flip”.
Of course, the idea that Harbinger could remain in control rests on Falcone’s view that “a bankruptcy would not necessarily wipe out the equity holders of LightSquared because the spectrum it owns retains value” (something that I’m told debtholders consider simply “delusional”). At this point in time, the LightSquared spectrum is only usable for satellite services, which its very hard to believe could generate any positive value (because it would be difficult and time consuming for the satellite business even to reach cash flow breakeven).
As I’ve said in the past, the best case is that 20MHz of the spectrum might be usable in a decade or more for a terrestrial service, but if you have to wait a decade for the spectrum to be usable, and LightSquared’s “$10B waiver” has been withdrawn, then its hard to see why anyone would pay more than the $1.4B DISH paid for 20MHz of TerreStar spectrum last summer. Unfortunately using the spectrum at all would require maintaining the lease deal with Inmarsat at an NPV cost of somewhere between $1.5B and $2B (depending on the discount rate applied), which would need to be deducted from the above sum, and so its not clear that there is any positive value for the spectrum under this scenario either.
The last remaining hope to have some usable (and valuable) spectrum in the near term is to engineer a spectrum swap, but that would rely on the DoD showing some goodwill towards LightSquared, something which has hardly been evident to date.
As a result, after a voluntary bankruptcy filing, we would be thrown headlong into a valuation fight, where the debtholders tried to argue to the judge that LightSquared’s likely attribution to itself of a $2B-$3B valuation and proposed cramdown of the first lien debt was simply not feasible. It is difficult to see LightSquared prevailing, when the basis for a high valuation of the spectrum is simply not sustainable. However, these arguments will tie the company up in court for the rest of the year, and in the interim presumably Harbinger would try to stay in charge.
The timing of a bankruptcy filing is likely to be dictated not only by the April 30 expiry of LightSquared’s waiver in respect of the covenant breach from the termination of the Sprint agreement, but also by the status of LightSquared’s Cooperation Agreement with Inmarsat. Earlier this week, a deal appeared to be on the table whereby LightSquared would make the missed February payment of $56M and give up any claims that Inmarsat had failed to complete Phase 1, in exchange for a two year deferral of further payments. However, LightSquared appears reluctant to pay out additional money to Inmarsat when a bankruptcy filing would also prevent Inmarsat from terminating the Cooperation Agreement and could still allow LightSquared to reach a resolution with Inmarsat later on if that was felt to be useful. As a result, I expect LightSquared’s bankruptcy filing to come before the April 20 deadline on which Inmarsat can terminate the Cooperation Agreement for default, and plausibly it could be made over the weekend of April 14/15.
Mr. Falcone has also taken to the press to accuse “the FCC of bowing to special interests” by blocking his “shovel ready” project. The article suggests that he “first got into the telecom business in 2010″ when he “placed a $14 billion bet on what he thought was a sure thing”, which of course is revisionist history at its worst. In fact Mr. Falcone had been an investor in the predecessors to LightSquared and TerreStar since 2004, and made most of his purported $2.9B investment well before 2010.
Since the FCC granted the SkyTerra transfer of control (including various ATC license modifications and what appears to have been an implicit promise of a later waiver) to Harbinger in March 2010, the investment has mostly come from third parties. By my calculations, Harbinger has only invested about $700M into LightSquared over the last two years (including the cost of buying out minority equity investors in SkyTerra), while other investors have put in roughly $2B.
A better account of the history would be that by late 2009 (when Harbinger decided to buy out the other investors in SkyTerra), Harbinger had already invested over $2B in this project which had all gone to waste. At that point, Mr. Falcone desperately tried to rescue his losing bet (with assistance from the FCC) by persuading other people to invest their money into this supposedly valuable spectrum.
Remember that Harbinger also invested almost $1B in TerreStar’s equity and preferred shares from 2005 through 2010, attempting the same trick of converting satellite spectrum for terrestrial services, and that also was lost when Echostar acquired TerreStar’s senior debt and pushed Harbinger out, just as Icahn is likely to do in LightSquared. Ironically, back in August 2010, when TerreStar was on the point of bankruptcy, Falcone also claimed to Reuters that TerreStar’s senior debt was easily covered by its spectrum value. He was wrong then, as DISH’s ultimate bid was just enough to pay off the senior debt (which Echostar held the majority of) at par and unsecured creditors lost most of their claims (while the equity in TerreStar Networks was worthless). In the case of LightSquared it appears he will be wrong by an even greater margin, because GPS interference and the Inmarsat lease costs will dramatically reduce any interest in buying the LightSquared spectrum, and make it hard even for secured creditors to realize much of a recovery.
After today’s FCC Open Meeting there is a lot of speculation about the content of the 2GHz NPRM and NOI which is expected to emerge very shortly. The FCC indicated that it would reallocate the entire 40MHz of spectrum (2000-2020MHz uplink/2180-2200MHz downlink) to terrestrial services, redesignating it as the AWS-4 band. Many have assumed that this means that DISH would secure unlimited terrestrial rights across the whole band, with no givebacks, but the FCC was careful to indicate in the press conference afterwards that “flexibility applies across the whole band” but not that DISH will get flexibility across the entire 40MHz.
UPDATE: The NPRM has now been released and it appears that there is no definitive requirement for DISH to give back any spectrum, and it would simply be allocated terrestrial licenses nationally in exchange for a buildout criteria of 30% of the population within 3 years (not dissimilar to the 100M POPs agreed to by LightSquared) and 70% of the population in each economic area within 7 years (a somewhat less onerous requirement than LightSquared). Though the possibility is raised that DISH will move up by 5MHz and possibly even give up another 5MHz of uplink spectrum, there is no mention of a larger amount of spectrum being returned to the FCC in exchange for these terrestrial rights, suggesting that Charlie Ergen has played a stunningly good hand of poker to achieve such a result. Of course, it would not be in the least bit surprising to see accusations of a windfall emerge, just as they did with LightSquared.
The FCC has also accompanied the NPRM with an NOI, which proposes a “variation of the AWS-4 band plan” intended to “extend the AWS-1 and PCS spectrum with 65MHz of usable bandwidth”. This alternate plan involves converting the MSS uplinks to downlink spectrum, so that the entire 1995-2025MHz band would be additional PCS downlink spectrum. In exchange the MSS licensee could be granted access to the 1695-1710MHz band which would be paired with 2180-2200MHz as an AWS extension band. This hardly seems to be something that DISH would be keen on, given that it would involve defining another non-standard band class, and would not be compatible with the existing 2GHz satellite services, which DISH might at some point want to explore in Europe.
What is striking is that the FCC’s proposals are hard to reconcile with the requirement in the payroll tax bill back in February that the FCC should identify a “additional 15MHz of contiguous spectrum” to be auctioned, which is why I had assumed the NOI would propose that DISH gave up 10MHz of spectrum and moved its uplinks up by 5MHz into the 2020-25MHz J-block spectrum, as I indicated back in February.
In this context it is hard to see why the FCC bothered with the NOI, unless it is to use this to put more pressure on DISH to give up part of its uplink spectrum. I had guessed that the NOI would be the FCC’s preferred outcome and so NPRM would propose far more unfavorable terms for DISH. In other words, the NPRM would be “designed to fail” in order to drive all parties to a solution which would free up a greater amount of spectrum for auction.
Now we will have to see how commentators react to the NPRM. Could further pressure be brought to bear over the potential windfall, leading to a proposal that DISH gives up an extra 5MHz of uplink spectrum and create the 15MHz block of spectrum for the FCC? If not then the FCC will presumably have to look elsewhere for spectrum to meet the Congressional mandate, unless it perhaps claimed that it is not possible to auction the H-block due to interference concerns in the 1915-1920MHz band, and so the 1995-2010MHz block would meet this mandate. More importantly, the FCC appears to be betting that DISH will actually build out a network to introduce competition to the US wireless market, and so if the end result (after the November election) is a takeover bid from AT&T, it will be interesting to see what attitude the FCC takes to such a bid. If that occurs, and goes through without any further givebacks, then the FCC might very well be seen to have failed in its attempts to maximize the value of spectrum for the public interest. On the other hand, perhaps that could be the point at which an additional 5MHz of spectrum might be given up.
FURTHER UPDATE: As an aside, the NOI doesn’t appear to do much for LightSquared’s hopes of creating substantial incremental value for its Crown Castle lease in the 1670-75MHz block. LightSquared is apparently busy trying to extend its financial runway, but it may now be more difficult to avoid the looming financial crunch at the end of the second quarter of 2012, when LightSquared must repay a roughly $300M loan to its creditors.
Bizarrely enough, the price of LightSquared’s debt has been increasing over the last week, as the company failed to file for bankruptcy in advance of the termination of their agreement with Sprint, which is expected to come today, and LightSquared hired lawyers to sue the government for compensation, once their ATC license is revoked by the FCC. The primary reason for this delay appears to be that major investors (Icahn/Appaloosa/Beal, who may hold as much as $500M-$600M in face value of the $1.6B in first lien debt) are sitting on the sidelines, apparently unable to decide what they would do if they forced LightSquared into bankruptcy, while UBS (who may still hold $300M-$400M of the first lien debt) certainly do not want a bankruptcy (because then they would probably become a target for litigation).
As I understand it, if LightSquared continue to pay the interest on their debt (of which ~$50M in cash is due on April 1) then a two-thirds vote of debtholders would be needed to force the company into bankruptcy, and so I now expect that LightSquared will probably make the interest payment due at the end of this month. Once Sprint return $65M to LightSquared after their agreement is terminated, and with payments no longer being made to Inmarsat, LightSquared will then still have over $200M in cash on its balance sheet at the end of the first quarter, allowing LightSquared to continue to pretend (for potentially the rest of this year) that they can succeed with a lawsuit against the FCC or obtain a spectrum swap from the government. The only large near term outstanding payment is the repayment of around $300M due at the end of June on LightSquared’s holding company loan, and LightSquared are suggesting that the sale of their terrestrial spectrum leases will be enough to cover this repayment (though that assumes both a favorable proposal from the FCC next week and a lot of interest in the 1670-75MHz spectrum).
Of course if LightSquared do drag this situation out for so long, then the potential recovery for investors may be considerably less than I originally anticipated. LightSquared appears unlikely to challenge the termination of its deal with Sprint, thereby writing off $236M that was advanced to Sprint last year, and may also allow its deal with Inmarsat to expire on April 20, thereby preventing any deployment of a terrestrial network in their L-band spectrum in the future and potentially giving up the $490M paid to Inmarsat so far. In addition, there may be little or no cash left on the balance sheet, limiting any recovery and perhaps even raising the possibility of DIP financing being needed for a lengthy bankruptcy. Thus its hard to see why investors would regard a delay in a bankruptcy filing as a positive development for the company.
In the meantime, LightSquared also continues to have bad luck with its satellite, after the new SkyTerra-1 satellite suffered a lengthy outage last week, leaving its existing satellite customers (over 200K terminals) without service from March 7 to March 11. While the satellite does not appear to be damaged, this event will undoubtedly be exploited to raise further doubts about whether customers could rely on the LightSquared satellite for service, assuming the second satellite remains a ground spare rather than being launched into orbit.
This development may also make it harder to come up with an alternative satellite-only business plan to preserve the LightSquared business while the FCC considers whether to allow terrestrial use in the L-band at some point in the distant future, after a lengthy transition period to allow GPS and MSS terminals to be upgraded.
However, it was already difficult to envisage such an outcome, when the majority of panelists on the spectrum panel I moderated this week at the Satellite 2012/MSUA-9 conference estimated that it would take 15-30 years before any terrestrial network could be deployed in the L-band MSS spectrum, beyond the end of life of the SkyTerra-1 satellite.
After the FCC’s release yesterday evening of the agenda for the March 22 Commission Meeting, we are soon going to find out if DISH has struck a deal with the FCC to secure a waiver of the ATC restrictions in the 2GHz MSS band. Some commentators have seen the FCC agenda as a negative sign, pointing to potential delays in DISH’s deployment, based on the comments made by Charlie Ergen last week.
However, another way to look at this announcement is that the FCC is simply moving to implement the provisions in the spectrum bill signed by the President last week (including the proposal for “an alternative band plan…at 1695-1710 MHz”), which as I pointed out, clearly indicates that DISH would potentially give up 10MHz of spectrum and move its uplink band up by 5MHz to enable use of the PCS H-block.
Assuming that DISH gives up half of its uplink spectrum and this is converted into an additional 10MHz unpaired downlink at 2000-2010MHz (with an implicit guardband at 2010-15MHz), thereby maximizing the value of spectrum to be included in a future auction (and allowing Sprint the possibility of a 10x20MHz LTE Advanced network), then a rulemaking would certainly be needed to develop service rules for this new band configuration. However, it seems unlikely that the FCC would want to go back on what appears to have been a carefully engineered compromise passed by Congress just a couple of weeks ago. Given that Sprint’s agreement to settle its litigation against DISH back in October was also likely founded on a desire to gain access to the H-block spectrum, it wouldn’t just be DISH that would be upset by such a decision.
The proposed rulemaking may also achieve a couple of other purposes for the FCC. First of all it allows any deployment timetable to be keyed off the point when the new rules become final, thereby solving the arguments over whether the clock should start running on DISH’s buildout now or in 2015. Secondly it may help to push any bid by AT&T to buy DISH out beyond the November 2012 election and provide time for DISH to pull together an alternative consortium of partners (which might include one or more of T-Mobile, MetroPCS, DirecTV and America Movil). The wholesale access conditions contemplated by the Commission could then ensure that AT&T would not be able to unwind other partners’ access to this network in the future.
UPDATE (3/2): The FCC has just approved the transfer of control for DBSD and TerreStar this evening, but denied DISH’s application for the waiver, deferring this issue to the NPRM which will be considered at the Commission meeting on March 22. It appears that the FCC still wants to pursue the path outlined above, but was worried about the ramifications of granting the waiver without consideration of the proposed deal in a full public rulemaking, especially in the context of impending litigation from LightSquared. This also should allow the Commission to push any prospective bid from AT&T for DISH beyond the November 2012 election. However, with DISH noting in their results call that a refusal to grant the waiver could cause them to significantly change their plans, it will be very interesting to hear DISH’s reaction and see whether they will take this proposed deal off the table (for example by returning to the dual mode handset model contemplated by the original ATC rules), thereby torpedoing the FCC’s chances identifying 15MHz of additional spectrum to auction as Congress mandated last month.
FURTHER UPDATE (3/2): It sounds like the FCC is doing its best to reassure DISH that the outcome of the rulemaking is going to result in the band being redesignated for terrestrial-only services, and that a ruling will come before the end of the year. DISH’s response (with its reference to delaying “the advancement of some of President Obama’s and the FCC’s highest priorities”) appears to hint at the real reason for this delay, that after the LightSquared debacle, the White House simply doesn’t want any more trouble before the November 2012 election, and certainly doesn’t want to contend with an AT&T takeover bid for DISH in that timeframe.
According to this book, Americans are “the worst negotiators on Earth” and it appears that LightSquared are unlikely to prove the author wrong. I noted last week that LightSquared’s contract with Inmarsat apparently permitted Inmarsat to assert completion of its Phase 1 spectrum transition (under which it is paid $250M to fit filters to its terminals) without actually retrofitting any terminals. Specifically the Cooperation Agreement with Inmarsat signed in Dec 2007 states that:
In accordance with the provisions of this Agreement, each Party shall expedite the development of an implementation plan, which shall be coordinated with each of the other Parties, that will reflect all such actions as shall be necessary or advisable to effect the implementation of the L-band frequency ITU Region 2 use arrangements set forth in the respective Spectrum Plan, including, but not limited to (i) replacement or modification of user terminals, including in the case of the Phase 1 and Phase 2 Spectrum Plans, adding appropriate filters to all terminals operating on the Inmarsat system that might otherwise receive interference from or cause interference to the operation of the systems of the MSV Parties operating in accordance with this Agreement (or otherwise addressing such interference by other appropriate means, including at the absolute discretion of Inmarsat by discontinuance or replacement of any affected service or terminal)…
While at first sight it would appear that this clause requires Inmarsat to actually fit some filters, I believe that Inmarsat will argue they are given “absolute discretion” to simply replace any terminal that is affected by LightSquared’s operations, using the new filter technology it has developed, and of course no terminals will be affected if LightSquared never operate a terrestrial network.
In addition, Section 4.4 Payment on Completion of Implementation of Phase 1 Transition states:
The MSV Parties shall not be entitled to operate under the Phase 2 Spectrum Plan or benefit from the operational parameters set forth in Section 3.5 [ATC Operations] until such time as the payment under this Section 4.4 is made to Inmarsat.
Thus if LightSquared do not make the $56.25M payment that they skipped on February 18, they are not allowed under the terms of the Cooperation Agreement to actually operate a terrestrial (ATC) network. Of course its not only LightSquared’s agreement with Inmarsat that is a bad sign for potential investor recoveries after the inevitable bankruptcy filing, but also the status of its agreement with Sprint, as revealed today in Sprint’s 10-K for 2011, which states:
The arrangement contains contingencies related to possible interference issues with LightSquared’s spectrum, including the right of Sprint to terminate the arrangement if certain conditions are not met by LightSquared. As of December 31, 2011, the Company had received $310 million of advanced payments from LightSquared for future services to be performed under the spectrum hosting agreement.
Beginning in December 2011, through a series of amendments, the arrangement was modified to, among other things, extend the date in which Sprint has the right to terminate the arrangement and suspend Sprint’s obligation to incur any further cost or expense related to performance under the original agreement. Under the amended arrangement, Sprint, for any reason, including but not limited to FCC action or inaction, or no reason at all, may terminate the agreement after March 15, 2012 and before April 30, 2012. If LightSquared secures lender’s consent for modifications to the agreement, Sprint’s right to terminate will be deferred until June 25, 2012 and will continue through December 31, 2012. In addition, the parties definitively agreed that approximately $236 million of the total $310 million of advanced payments made by LightSquared represent payment for incremental costs or obligations incurred by Sprint under the original agreement in support of LightSquared. The parties agreed that this amount is irrevocably and unconditionally paid and will not be subject to dispute or claim by LightSquared. Accordingly, Sprint will refund up to approximately $74 million of Lightsquared’s initial prepayments, of which $65 million will be paid on the earlier of LightSquared’s lender’s consent or March 15, 2012, and the remaining $9 million will remain subject to the termination and unwind provisions of the original agreement and will be returned to LightSquared upon termination, less any additional incremental cost or obligations incurred by Sprint in support of LightSquared. In the event the arrangement is terminated for LightSquared’s material breach, non-payment or insolvency, Sprint maintains a second lien on certain of LightSquared’s assets, including spectrum assets.
Thus in December 2011, LightSquared definitively agreed to forfeit $236M of its advance payments to Sprint if they were unable to move forward which the agreement, which seems a huge sum of money when it appears Sprint had done basically nothing in terms of deployment apart from some initial network planning. Clearly LightSquared were deluding themselves as well as investors in December when they insisted that approval was going to be forthcoming in early 2012. However, this now puts further pressure on LightSquared to file for bankruptcy within the next two weeks, so that the December 15 revision to the Sprint agreement does not fall outside the 90 day bankruptcy window for review of recent contracts and payments.
Fundamentally I think that what both of these problems come down to is that in its negotiations LightSquared appear to have only considered the outcome if they were successful in deploying a network. I’m told that Inmarsat certainly focused most intently on the default provisions, because they always expected LightSquared to fail, and Sprint appear to have done likewise in demanding an upfront payment and then concentrating on retaining that money once LightSquared failed to get approval for their network. Both Harbinger and LightSquared were truly putting it all on red.
Close scrutiny of the spectrum related legislation in last week’s jobs bill appears to give a pretty comprehensive outline of the deal that is to be expected between the FCC and DISH over its transfer of control and waiver request for the TerreStar and DBSD spectrum. In particular, the FCC is tasked with auctioning the H block spectrum (1915-20/1995-2000MHz) and extended AWS-3 block (2155-2180MHz) plus 15MHz in the 1675-1710MHz band (presumably the 1695-1710MHz block previously recommended by the NTIA, though note update below), as well as identifying an additional 15MHz of contiguous spectrum to be auctioned.
Assuming that this additional 15MHz of spectrum is intended to be contiguous with the other spectrum listed above (rather than being a single 15MHz contiguous block), then it appears that DISH will give up 2x5MHz of its 2x20MHz of DBSD/TerreStar spectrum (2000-05/2180-85MHz), and move its uplink frequencies up by a further 5MHz into the original J block uplink (2020-25MHz) in exchange for the waiver, and so that there is no windfall to be criticized as in the case of LightSquared.
This would leave DISH with 2x15MHz of spectrum at 2010-2025MHz (uplink) and 2185-2200MHz (downlink) and would implicitly create a new guardband in the 2000-2005MHz block (though the FCC would apparently still be supposed to auction this spectrum) and a new paired block at 2005-10/2180-85MHz to be auctioned (though this block would likely be repurchased by DISH or its partners in the ensuing auction because it would have relatively little value to other players). As Walt Piecyk at BTIG Research previously noted, Sprint should also then be well positioned to add the H-block spectrum to its G-block LTE network (assuming that the 1915-1920MHz uplink would not interfere with the PCS downlink spectrum at 1930MHz).
Alternatively if the FCC really does intend to auction a single contiguous 15MHz block then I would expect DISH to give up 10MHz of its uplink spectrum, and move up into the J block uplink, creating an asymmetric 10x20MHz allocation with 2015-2025MHz uplink and 2180-2200MHz downlink. That might allow an extra 10MHz downlink of downlink to be inserted above the H block (at 2000-2010MHz), with an implicit guardband left at 2010-15MHz. Given the much higher value of downlink spectrum in a carrier aggregation model, this trade would potentially allow the FCC to raise much more money from a subsequent auction (though it would also prevent DISH from buying back the 2x5MHz it had given up).
Based on an ex parte filing by DISH last week, the company is also prepared to accept conditions to “facilitate competitive carriers’ access to DISH’s planned nationwide wireless network”, and presumably with these concessions the FCC would permit a relatively relaxed buildout mandate as DISH has requested. An extended timeline would also help DISH because the re-auction of the spectrum they would give up would probably come ahead of the activation of their new network, and potentially therefore allow 2x20MHz operations from launch (assuming DISH repurchased the spectrum).
However, AT&T is fighting a rearguard action to impose the same buildout conditions as LightSquared and therefore remove DISH’s flexibility to ally with alternative partners, which it seems could include not just MetroPCS or DirecTV but perhaps even T-Mobile and/or America Movil. Of course the more credible DISH’s alternative plan is, then the higher the premium that AT&T would have to pay to take over DISH, but based on DISH’s filing there appears to be no doubt that the FCC is determined to ensure wholesale access to DISH’s LTE Advanced network remains available to other operators, whether or not DISH is taken over by AT&T. After approval of the TerreStar transfer of control by the Canadian regulator two weeks ago, it now appears that the FCC is expected to announce its ruling in the first half of March, so we should know the answer to all of these questions very soon.
UPDATE (2/22): With respect to the 15MHz of spectrum to be identified in the 1675-1710MHz band, this was originally expected to be an uplink band (to be paired asymmetrically with the AWS-3 downlinks), and would therefore most appropriately be located next to the AWS-1 uplinks at 1710-55MHz. However, I understand that there is pressure to use this 15MHz of spectrum for either carrier aggregation downlinks or TDD operation, which would not be feasible right next to the AWS-1 uplinks. As a result, it is plausible that the 15MHz of reallocated spectrum could be moved to the bottom of the band (1675-90MHz), adjacent to Crown Castle’s 1670-75MHz block, which is leased to LightSquared Inc.
Harbinger has previously stated that it plans to sell this spectrum to raise money and the potential windfall from the spectrum bill creating a contiguous 20MHz block of spectrum might increase its value significantly. Harbinger would presumably hope to pay off the term loan of roughly $300M which is due for repayment on July 1 (this is separate from the debt secured by LightSquared’s satellite assets), and that would require the 5MHz block to achieve a value of around $0.35-$0.40/MHzPOP once the costs of buying out the Crown Castle lease are taken into account. Though that may be feasible, with only a small 5MHz sliver of spectrum being sold, it seems unlikely that this sale could raise enough to provide a meaningful amount of additional capital or any return to Harbinger on their previous investment in the company. In addition, it is much harder to see any use for the 8MHz of 1.4GHz spectrum leased from TerreStar, and so it is unclear how long this lease will continue. However, for once it seems plausible that Harbinger might have finally found one small block of spectrum that the government can enable them to actually make a profit on. Its just a shame that so much more money has been wasted on unusable satellite spectrum in the meantime.
Today news has emerged that LightSquared have failed to make the $56.25M payment to Inmarsat that was due upon completion of the Phase 1 spectrum transition, which Inmarsat certified was complete on Saturday February 18. This development is hardly surprising, because as I indicated last week, LightSquared’s investors were adamantly opposed to the payment being made. LightSquared are claiming that there are “several matters to be resolved” before the payment is due, apparently suggesting that Inmarsat have not fitted filters to their own equipment as they were being paid to do in Phase 1, while Inmarsat are stating “categorically that we have fulfilled what was required on Phase 1 of the agreement”.
Intriguingly, Inmarsat apparently believe that it is not necessary to actually fit filters to their terminals in order to fulfil the Phase 1 conditions, simply that they must be willing to accept any interference generated by LightSquared’s terrestrial operations (which of course will not arise because LightSquared have been forbidden from actually operating a terrestrial network by the FCC). It would be strikingly cynical if Inmarsat hadn’t bothered to fit any filters (and as far as I know no equipment has been retrofitted to date), because they always believed that GPS interference issues would prevent LightSquared from actually getting into service. However, that certainly seems to be the most plausible interpretation of what has happened, because (independent of GPS) serious problems could arise with maritime and aeronautical safety services (on Inmarsat terminals without filters) if LightSquared did actually commence terrestrial operations at this point in time.
UPDATE (2/22): Inmarsat’s ATC team wanted me to know that theyexist and have been working to develop ATC-resistant terminals. I know that some ATC-resistant terminals (e.g. IsatDataPro, ISatM2M, BGAN M2M, ISatPhone Pro) are already on the market, but my point above was that there has been no attempt to retrofit existing terminals used for maritime and aeronautical safety services. Indeed, Inmarsat told its partners in April 2011 that the timeline for introduction of SwiftBroadband aero safety services (which will provide ATC-resistance) “envisages flight trials in early 2013 leading to safety certification during 2014″.
As a result of LightSquared’s failure to make the payment, Inmarsat has issued a Notice of Default, which gives LightSquared 60 days to make the payment or else the Cooperation Agreement will be terminated. The key question now is whether the simple receipt of this Notice (as opposed to termination of the Cooperation Agreement itself) is sufficient to cause an Event of Default on LightSquared’s first lien debt. Although LightSquared are arguing that the Notice is invalid (because they claim Inmarsat have not fulfilled the Phase 1 requirements) that may ultimately be irrelevant if LightSquared’s investors now try to force the company into bankruptcy. I’m sure we will see a lot more news on this front in the next few days.
After a very eventful day, Mr. Falcone is claiming that he has a cunning plan and that bankruptcy “is clearly not on our table”. However, it certainly appears to be on the mind of LightSquared’s investors, who are laser-focused on stopping the $56.25M payment to Inmarsat, which is expected to be made on Tuesday next week, after the President’s Day holiday. Under pressure from investors (and UBS), LightSquared has now reportedly hired restructuring advisers from Moelis and Company, but it appears that Mr. Falcone is actively resisting UBS’s entreaties that the best way forward would be to file for bankruptcy and stop LightSquared’s cash draining away. Indeed it appears that LightSquared may have cash expenses totaling nearly $200M between now and early April, of which the vast majority would go to Inmarsat. If Mr. Falcone continues to resist then I suspect the next step may be for Mr. Icahn and others to initiate a rather more public dispute with Harbinger.
Part of this cunning plan may be to seek a spectrum swap for part of the AMT band (1515-25MHz), which LightSquared reportedly pitched to the DoD last month, despite the “extremely formidable difficulties” this would entail. Of course it is hard to see why the DoD would want to give up this spectrum, when it seems implausible that they could use the L-band satellite spectrum for these terrestrial operations instead, and being directly below the 10L block, it is not a foregone conclusion that there would be no interference to GPS. As a result, that element of the plan does not appear to be a particularly viable near term option.
The second part of the plan appears to involve trying to pressure the FCC into proposing some compensation for the supposed abrogation of LightSquared’s 2004 license. The FCC’s Public Notice doesn’t seem to actively discourage this view, complaining that no overload interference concerns were raised until 2010, and stating that:
“…although the GPS community raised overload interference issues in connection with the 2011 Conditional Waiver Order, the interference addressed by the NTIA Letter is associated with LightSquared’s planned terrestrial base stations rather than the mobile handsets at issue in the Conditional Waiver Order. Thus, the test results stated in the NTIA Letter appear to apply to the full LightSquared ATC service authorized in 2004 and 2010.”
On the other hand, the FCC is clearly being extremely careful from a legal perspective, and as the GPS industry have noted in the past, all ATC operations are subject to CFR 25.255, which states:
If harmful interference is caused to other services by ancillary MSS ATC operations, either from ATC base stations or mobile terminals, the MSS ATC operator must resolve any such interference. If the MSS ATC operator claims to have resolved the interference and other operators claim that interference has not been resolved, then the parties to the dispute may petition the Commission for a resolution of their claims.
It will therefore be very interesting to see how the FCC rules. With a comment deadline of March 1 and no reply comment period, it appears that the FCC wants to dispose of this matter quickly, though any ruling will certainly have to be very carefully written to withstand legal challenges. It seems that for the moment Harbinger are trying to keep their options open and hoping that either the DoD or FCC throws them a bone, before major payments are due at the end of March. However, it is inconceivable that a spectrum swap could be engineered in that time period and it hardly seems plausible that the FCC would proactively offer taxpayers’ money to LightSquared by way of compensation.
With respect to some of the other developments today, it is notable that Sprint are claiming they would only have to return $65M of the $310M that LightSquared had paid by the end of September. That is a big shock because I had assumed Sprint might return at least $200M to LightSquared’s creditors. If LightSquared remains determined to pay yet more money to Inmarsat and might only recover a small fraction of its advances to Sprint, then that is a very negative sign for LightSquared debtholders.
