10.22.10
Posted in Regulatory, Spectrum at 8:43 pm by timfarrar
I vividly remember attending the Cisco analyst conference in the fall of 1999, soon after I moved to the US, and being confronted by a rosy picture of ever increasing demand for telecoms equipment because of the dramatic growth in Internet traffic. I was moved to ask the question of whether in fact we were in a bubble, and if Cisco’s revenue trajectory would therefore end up resembling its logo. Perhaps unsurprisingly, I was never invited back to that particular event.
This evening I took the time to read Andrew Odlyzko’s seminal paper on Internet traffic growth in the 1990s. This paper explores the myth that Internet traffic was doubling every 100 days, which was a key contributor to the telecoms bubble of the late 1990s, and the subsequent loss of hundreds of billions of dollars of investors’ money. One of the highlights mentioned in Odlyzko’s paper was former FCC Chairman Reed Hundt writing in his book You Say You Want a Revolution that “[i]n 1999, data traffic was doubling every 90 days ….”. In reality, Internet traffic was growing rapidly, nearly doubling every year, but the growth rate from a short period of initial growth in 1995-96 had been erroneously equated to a long term growth rate. It was of course in everyone’s interests to promote this myth – it pumped up valuations, allowed startups to raise billions of dollars, and enabled politicians and others (such as Cisco) to claim credit for developing “the new economy”.
Thus it is particularly striking that we now see the current FCC Chairman using a flawed study to promote the “transformative moment we must seize” because “we are likely to see a 35X increase in mobile broadband traffic over the next 5 years” (based ironically to a significant extent on Cisco forecasts). We also see startups such as LightSquared and Clearwire raising (or at least trying to raise) billions of dollars on the back of their spectrum assets to build out new networks and realize the “extraordinary opportunity of communications technology” that the FCC Chairman envisages.
Of course it is true that mobile broadband demand is growing rapidly, just as Internet demand was growing rapidly in the late 1990s. However, perhaps we should pause and ask whether we are in danger of repeating some of the mistakes of a decade ago? When cellular operators, spectrum owners, equipment suppliers and regulators all have a vested interest in talking up the spectrum crisis, there has to be a danger of disappointment. I’ve already commented that spectrum might not be such a good investment and that the Clearwire auction looks to be going badly. There are even rumors that Clearwire is preparing for a round of significant layoffs. As a result I have to wonder whether we will look back at this moment in six months or a year, and conclude that yesterday’s FCC spectrum summit marked the point at which the spectrum bubble began to unwind.
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Posted in Regulatory, Spectrum at 2:41 pm by timfarrar
Yesterday the FCC announced with much fanfare the release of a new technical paper giving its “Mobile Broadband Spectrum Forecast”, which was trumpeted by the FCC Chairman as putting “the importance of this debate in perspective by assessing the economic value of this spectrum, which it estimates to be as high as $120 billion”.
The FCC paper is a fairly unsophisticated analysis, and its results contrast significantly with an Ofcom study released in April 2009 which found that under most scenarios for data growth the UK was unlikely to experience a spectrum crisis until 2020 or beyond. Although the UK is of course a very different market to the US, it was a surprise that the results were so dramatically different, which prompted us to take a closer look at the FCC calculations.
Unfortunately it appears that the FCC analysis contains a significant error in its calculations. Specifically, while the study assumes that all future cell sites are deployed to add capacity, it neglects to take into account that a significant fraction of current cell sites were deployed purely for coverage in rural and suburban areas, and are unlikely to ever need more spectrum beyond that available today. As a result, following the FCC’s methodology, these cell sites should not be included when calculating how much new capacity and spectrum is needed (as the FCC indicates elsewhere in the paper, upgrading to more spectrally efficient technologies would provide significant gains and presumably sufficient capacity when data usage does increase in rural areas).
UPDATE: Assuming somewhere between 20% and 50% of current cell sites (as of 2009) have been deployed for coverage rather than capacity (which seems reasonable, as according to the FCC Competition Report, cellular voice services are provided to 60M people in rural census blocks covering 2.3M square miles, and 76% of these regions have two or more providers) then the FCC’s own analysis shows that the incremental spectrum demand by 2014 is reduced from 275MHz to between 117MHz and 227MHz and the cost of deploying extra cell sites to serve this demand (the FCC’s definition of “economic value”, assuming a cost of $550K per cell site) is reduced from $120B to between $33B and $85B. Only 60K-155K additional cell sites are needed to meet demand, compared to the 99K that the FCC’s model estimates will be deployed anyway in the next 5 years. Put another way, the annual growth in the number of base stations would increase from 7% p.a. to between 10% and 15% p.a., which is not significantly out of line with the 12% growth in base stations that occurred in 2009, according to the FCC’s own figures.
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10.21.10
Posted in Financials, LightSquared, Operators, Spectrum, TerreStar at 12:56 pm by timfarrar
One of the most important documents filed so far in the TerreStar bankruptcy case is the Restructuring Support Agreement, which TerreStar (and Echostar as the majority holder of the first lien debt) have committed to support as a basis for the plan for emergence from Chapter 11. This agreement will convert the Senior Secured PIK Notes ($944M of principal and accrued interest) into 97% of the new equity of TerreStar Networks (TSN), with the remaining 3% shared between the Exchangeable Notes ($179M of principal and accrued interest) and other unsecured claims. No distribution will be made to the original holders of interests in TSN (the 89% held by TerreStar Corporation and the 11% held by LightSquared). In addition there will be an offering of $125M of Preferred Stock to repay the DIP, with rights to subscribe to 97% of this Stock offered to the Secured Notes holders and the remaining 3% offered to the holders of Exchangeable Notes/unsecured claims. Echostar has agreed to backstop $100M of this $125M offering. The “net distributable value” under the Plan is set at $1.050 billion, and the Preferred Stock will be issued at a discount of 35%. Under the Plan the only outstanding debt after emergence from bankruptcy would be the Purchase Money Credit Facility (PMCF), which currently has $86M outstanding.
The RSA also includes a declaration from Steven Zelin of Blackstone, which sets out details of the negotiation process leading up to the bankruptcy filing. Many of the developments are broadly in line with what we had surmised, notably that TerreStar had tried to float a much larger DIP of $250M, initially using the 1.4GHz spectrum and the ground spare satellite as security (after repaying the PMCF), and later by priming the first lien debt. However, neither option proved feasible, the first apparently because the 1.4GHz spectrum plus the ground spare satellite did not provide sufficient security, and the second because it was anticipated that a priming fight would be difficult to win. As a result, TerreStar was forced to accept Echostar’s proposal for a $75M DIP and plan of emergence set out in the RSA.
The unanswered question is to what degree Harbinger is content with the outcome – it certainly appears to have been on the opposite side from Echostar in the early part of the negotiation process (apparently agreeing to participate in the first proposed DIP) but then it agreed with Echostar to provide a $10M advance under the PMCF, which explains how TerreStar managed to stay out of bankruptcy until now. However it seems a huge stretch to imagine that this means there is some agreement between Harbinger and Echostar to join forces and collaborate in LightSquared, as Credit Suisse have suggested. In particular, there are plenty of other reasons for both companies to have wanted to delay the bankruptcy filing: in Echostar’s case because they needed to negotiate over their own proposal, and in Harbinger’s case because they were trying to finalize additional funding for LightSquared.
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10.19.10
Posted in Financials, LightSquared, Operators, Spectrum, TerreStar at 2:41 pm by timfarrar
This afternoon, TerreStar Networks and various affiliates filed for bankruptcy, and entered into an agreement with EchoStar Corporation, its largest secured creditor, to provide the Company with a $75 million debtor-in-possession financing facility (as we surmised on Saturday). In addition, Echostar will support a restructuring premised on a debt for equity conversion by the Debtors’ secured noteholders, and backstop a $100 million rights offering that will provide the funding for TerreStar Networks’ exit from Chapter 11.
As shown in the diagram below from the TerreStar Networks Chapter 11 petition, the publicly quoted parent, TerreStar Corporation, did not file for bankruptcy, and presumably could continue to operate using the $2M per month that Harbinger is paying for its lease of the 1.4GHz spectrum. However, in the short term, this $2M per month will not be cash revenue, because the $30M advance received back in January covers payments for 15 months of the lease (i.e. until next May) and has already been spent. Thus it is unclear how TerreStar Corporation will find its near term operating funds.
UPDATE: TerreStar Corporation has now filed an 8-K confirming the tolling agreement to suspend its litigation with Highland Capital and that Highland, Solus and Harbinger have agreed to loan the company $1.25M for a period of 75 days. It appears that this may provide a window of opportunity to either negotiate a sale of the 1.4GHz spectrum or decide if TerreStar Corporation should file for bankruptcy. TerreStar Corporation has also agreed that its shares will be delisted from NASDAQ.
TerreStar Corporation will retain control of its 1.4GHz spectrum assets, but will see its shareholding in TerreStar Networks wiped out in the bankruptcy (note that both the TerreStar-1 and TerreStar-2 satellites and their 2GHz MSS-ATC spectrum allocation are included in the bankruptcy proceeding). As a result, the residual value of TerreStar Corporation will basically be equal to the value of the 1.4GHz spectrum assets. However, it is hardly plausible that this spectrum could be worth more than the $408M (+ accrued interest) outstanding in TerreStar Corporation’s preferred stock.
Though a TerreStar bankruptcy has been rumored for several months, it has been a long time in coming. This appears to have been caused by several changes in plan, as it appears the original intention was to try and avoid losing control of TerreStar Networks and its spectrum, and raise money against the assets at TerreStar Corporation, a task which apparently proved fruitless. There is no mention of any role for Harbinger in the press release announcing the Chapter 11 filing, so it will be interesting to see what happens next with the 2GHz MSS spectrum. However, it certainly appears possible that there could be yet another source of spectrum on the market competing for buyers with Clearwire and LightSquared.
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10.16.10
Posted in Financials, ICO/DBSD, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 7:58 pm by timfarrar
Reports have now emerged that a TerreStar bankruptcy filing may take place as soon as Sunday, October 17, with “one creditor” potentially providing about $75M in DIP financing. It would not be a surprise to see a bankruptcy filing this weekend, as the interest payment on TerreStar’s preferred stock, which was due on Friday, had always provided a deadline for resolution of the funding situation.
Now the question turns to who will provide this DIP. The fact that it is described as coming from “one creditor” indicates that this is almost certainly Echostar, given that Harbinger could potentially face regulatory concerns if it was to acquire control of TerreStar in addition to LightSquared. As we noted in previous posts, it appears there may have been efforts earlier in the summer to syndicate a much larger DIP to other parties and cram-up the first lien debt. However, assuming these efforts have failed, Echostar presumably will be able to protect its first lien position by providing the DIP itself.
It will be very interesting to see whether Harbinger will retain a position of influence in TerreStar or if it will end up largely sidelined in a TerreStar bankruptcy. In the latter case, it is quite plausible that in addition to Clearwire’s ongoing spectrum auction, Harbinger could find itself faced with competition for strategic partners from yet another source of spectrum – the opportunity to access the 2GHz ATC spectrum. Of course, some wireless operators might prefer the spectrum to be returned and re-auctioned without ATC constraints in an incentive auction, but even the initial rulemaking won’t be complete until sometime in 2011, and an auction could take another year or more to organize. Thus until the FCC completes its MSS rulemaking, the owners of the 2GHz ATC spectrum (at least other than Harbinger) would certainly have nothing to lose in seeking out a potential buyer.
UPDATE: Harbinger has now stated that it is “not really involved anymore” with TerreStar, essentially confirming that it will not be providing the DIP financing. This comment also tends to suggest that Harbinger might no longer be in a position to prevent the owners of the 2GHz ATC spectrum seeking a spectrum buyer in competition with LightSquared.
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10.13.10
Posted in Financials, LightSquared, Operators, Spectrum at 8:40 pm by timfarrar
So news has finally broken that Clearwire is selling 40MHz of its spectrum, as we surmised back in May. However, the valuation range cited is relatively wide ($2.5B to $5B) representing $0.20 to $0.40 per MHzPOP, and Verizon (which was said to be one “potential buyer” of the spectrum along with AT&T, T-Mobile, Time Warner Cable and Sprint Nextel) has now denied it is bidding. It also hardly seems plausible that AT&T would be bidding for spectrum it was forced by the FCC to relinquish just a few years ago. As a result, the release of this information seems like it could well be an attempt to encourage bidding if the auction is not going too briskly, with “potential buyers” rather than actual bidders being listed to create an appearance of higher demand.
If the end result is towards the lower end of the quoted range, then that would clearly be a negative sign for spectrum valuations – falling far short of the $0.50 per MHzPOP valuation suggested by Clearwire and some analysts back in May and coming close to the $0.17 per MHzPOP paid by Clearwire when it acquired spectrum from AT&T/BellSouth in February 2007. If that’s the case, then it would imply that the value of this spectrum has hardly changed in the last three years, despite the supposed “spectrum crisis” that has been widely discussed.
Of course, the headline price for Clearwire’s spectrum is not the only factor that needs to be taken into account when considering this as a valuation benchmark for other spectrum bands. In particular, around 60% of Clearwire’s spectrum (in the EBS part of the band) was acquired under lease agreements, and though some of these are partly prepaid, others will require substantial future payments (totaling $5B over the next 30 years). Thus if Clearwire sells mostly owned spectrum for close to $0.20 per MHzPOP, then the implied spectrum valuation for other bands would be rather lower than if it sold a mix of leased and owned spectrum.
Nevertheless, a low valuation benchmark might well make fundraising more challenging for ATC spectrum holders. LightSquared noted in its presentation at Satcon today that it acquired its spectrum for the “low cost” of $0.20 per MHzPOP, and while one can argue that the propagation characteristics of LightSquared’s lower frequency L-band spectrum make it more valuable than Clearwire’s 2.5GHz spectrum band, mobile operators who are seeking spectrum simply for fill-in 4G coverage in densely populated markets may not necessarily see it that way. LightSquared also has ATC-specific risks to consider, related to the aggressive buildout commitments it made to the FCC back in March and the need for rebanding in the L-band (with the associated substantial payments to Inmarsat). As a result it remains to be seen whether the investments that Harbinger has made to acquire LightSquared’s spectrum will still be seen as a low cost at the end of the Clearwire auction.
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10.08.10
Posted in Financials, Globalstar, LightSquared, Operators, Regulatory, Spectrum at 11:30 am by timfarrar
Although we remain intrigued by the timing of yesterday’s announcement of LightSquared’s chipset and device partners, what is now clear is that next year should finally result in the actual commercial deployment of an ATC network, offering both satellite and terrestrial mobile services for the first time. (Although Open Range had deployed a couple of thousand terminals under its agreement with Globalstar prior to the FCC suspending Globalstar’s ATC license, these did not include two-way functionality, and to date no handheld terminals had been produced).
LightSquared now claims to have raised over $2B, which the company expects will see it through to “operational launch and beyond” in the second half of next year. Although it is not clear where the $2B is coming from, and whether (as yet unannounced) vendor financing will form part of that $2B or could be incremental to it, it is certainly the case that with Harbinger apparently injecting funds from a $400M UBS loan in July, converting its reported $430M of debt into equity (as part of this week’s $850M debt refinancing) and presumably investing the proceeds from the sale of half of its Inmarsat stake (for $650M) in LightSquared, the company should have enough money both to pay Inmarsat for the ongoing rebanding of the L-band, and to fund the buildout of its first markets in 2011, an outcome that looked like a distant dream less than a year ago.
Given that there are no significant remaining technical barriers to overcome in deploying their satellite network, and LightSquared has commitments to produce both chipsets and ATC devices from leading manufacturers, it will be interesting to see next year both how the LightSquared network is positioned and what the public reaction is to the service. In particular, will LightSquared’s retail partners attempt to use satellite as a key differentiator, or will they rely just on the LTE offering to compete with Verizon, Clearwire, MetroPCS and others?
In the nearer term, we will also look forward to finding out exactly who these retail partners will be, and whether any of them will make a financial investment in LightSquared itself. In that regard, it appears that T-Mobile is certainly keeping its options open with regard to LightSquared, having filed at the FCC in support of relaxing the ATC gating criteria, which currently require all devices to offer integrated satellite and terrestrial services. Leap Wireless also appears to be looking closely at the ATC opportunity, having initially proposed this relaxation of the gating criteria. Whether T-Mobile’s actions are part of its negotiating strategy with Clearwire, or whether T-Mobile and Leap really are taking a potential investment in LightSquared seriously, remains to be seen.
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10.07.10
Posted in Financials, LightSquared, Operators, Spectrum, TerreStar at 9:17 am by timfarrar
Although Harbinger/LightSquared hasn’t yet got a terrestrial network to rival those of other cellular operators, it certainly has proved more than a match for them in its PR department, garnering significant positive coverage in recent months for its buildout plans, fundraising and potential partners, despite the doubts of many commentators.
However, its also the case that LightSquared has deployed its PR efforts very strategically, most notably when it announced the deal with Nokia Siemens Networks in July, straight after a skeptical article appeared in the WSJ. This week we also saw the announcement of further funding for LightSquared immediately preceding the decision to sell half of Harbinger’s stake in Inmarsat.
As a result, we’re left wondering if today’s announcement of a chipset partnership and initial device manufacturers, which also “paints a very positive picture for where LightSquared is going”, signals that there will be some bad news coming out soon. What might that be? Well as we’ve pointed out before, decision day is rapidly approaching for TerreStar, which could well involve a bankruptcy filing or other restructuring, and would certainly be another worrying sign for the MSS-ATC sector.
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09.29.10
Posted in ICO/DBSD, Operators, Regulatory, Spectrum, TerreStar at 4:35 pm by timfarrar
The FCC has just released its ruling on cost sharing rules for the 2GHz BAS relocation, which requires that the 2GHz MSS players will have to pay their pro-rata share of the costs incurred by Sprint Nextel in clearing the band. Back in 2009, Sprint Nextel estimated these expenses would be about $100M for each MSS operator.
The FCC ruled that MSS operators would have 30 days to pay these costs after Sprint Nextel presented them with a bill (which could happen very soon after the ruling becomes effective, sometime in November). If the costs were not paid, then the Commission could take enforcement action, although it would not automatically suspend an MSS operator’s license as Sprint requested. In addition, joint and several liability for the costs would continue in the event that a license was transferred to another party (although the Commission did not address how this liability would be impacted by a bankruptcy filing). With respect to ICO Global’s potential joint liability with DBSD for its relocation costs, the Commission outlined certain principles which would apply to this question, but indicated that Sprint Nextel would have to pursue litigation against ICO Global to resolve this claim.
Though this ruling presents certain issues for DBSD, related to its emergence from bankruptcy, it also has a definite impact for TerreStar, as it is now likely that Sprint Nextel will seek to claim $100M+ from TerreStar by the end of the year. Of course, TerreStar Networks might wish to file for bankruptcy to try and avoid this liability just like DBSD (perhaps after the claim is presented rather than before?) and it remains unclear whether TerreStar Corporation would also be subject to joint and several liability. However, if TerreStar is to monetize its 2GHz spectrum in the future (e.g. through an incentive auction) for which it will very likely need the FCC’s cooperation, it seems rather unlikely that the FCC would also allow it to escape this reimbursement obligation, reinforcing that the FCC has numerous levers to ensure that the 2GHz spectrum question is resolved in the way it wants.
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09.28.10
Posted in Financials, LightSquared, Operators, Regulatory, Spectrum, TerreStar at 10:36 am by timfarrar
Back in August, it looked very much like TerreStar was poised to file for bankruptcy, using a large DIP facility of $200M+ to fund the company for the next several years while it attempted to build a satellite roaming business. Harbinger indicated at the time that it believed a bankrupt TerreStar’s spectrum was worth $1.5B to $2B. This suggests that (as we speculated) the plan may well have been to cram-up the ~$1B of first lien debt that is outstanding at TerreStar Networks. However, it appears that Blackstone was unsuccessful in finding takers for that financing, and so the question arises as to what is now their Plan B for TerreStar.
In TerreStar’s 2010Q2 10-Q, filed in early August, the company stated that “there is substantial doubt that the available cash balance, investments and available borrowing capacity as of June 30, 2010 will be sufficient to satisfy the projected funding needs for third quarter of 2010″ and yet we are now at the end of the third quarter and there has been no bankruptcy filing. AT&T also announced the commercial release of the Genus phone last week. Some have therefore suggested that this means TerreStar is likely to avoid bankruptcy, because AT&T would not have gone to market with the phone immediately prior to a bankruptcy filing.
Of course, if TerreStar had actually secured further investments, these would have to have been disclosed in an 8-K filing, but it is certainly clear the company has managed to make its cash resources last longer than it previously expected. One possibility is that AT&T paid upfront for the Genus phones it is selling, which would have provided some cash for TerreStar without the need for a public filing. It would also explain why AT&T is keen to move ahead with the commercial launch if it now owns several tens of thousands of Genus phones.
UPDATE: According to documents filed in the TerreStar bankruptcy proceeding, Echostar and Harbinger allowed TerreStar to draw a further $10M from the Purchase Money Credit Facility, and agreed to waive any claims of potential default. However, given that the bankruptcy documents show only a few hundred thousand dollars of expected receipts for TerreStar from phone sales by the end of the year, it still appears possible that either AT&T may have paid upfront for the phones it expects to sell, or (perhaps more likely) Elektrobit has been left holding the bag, given the substantial losses it expects to book on its TerreStar receivables.
However, TerreStar obviously also needs to raise further funds to cover its ongoing operating expenses. It has a window of time until August 2011 when no cash interest is due on TerreStar Networks’ first lien debt, and so it appears plausible that raising say $50M+ at TerreStar Corporation (presumably against the security of the 1.4GHz spectrum) would be (barely) sufficient to see the company through to next August, when the outcome of the FCC’s MSS NPRM/NOI should be clearer.
This might well still require a bankruptcy filing by TerreStar Corporation (depending on what happens with the outstanding $408M of Preferred Stock, since the company has certain obligations to redeem the Preferred Stock if it has more than $10M in available funds), but we assume that Blackstone might conceivably look to keep the TerreStar Networks subsidiary out of bankruptcy (assuming this is permitted by the cross-default provisions on the first lien debt) and thereby enable TerreStar Corporation to retain its shareholding in TerreStar Networks.
Then, if it turned out that the FCC’s NPRM allowed the 2GHz satellite spectrum to be monetized for more than the value of the outstanding first lien debt (something we regard as unlikely), the proceeds could potentially flow to the owners of TerreStar Corporation (although it is implausible that an auction could occur by August 2011 so there would certainly still be significant arguments about the value of this spectrum). In addition, this outcome would ensure that TerreStar’s 2GHz spectrum is not on the market as an alternative to LightSquared, while Harbinger seeks to secure partners for its LTE network buildout over the next 9 months.
UPDATE: From the TerreStar bankruptcy filings, it does not appear that the approach we speculated about would have been feasible, presumably at least in part because it was not possible to raise money against the security of the 1.4GHz spectrum, and in the last few weeks the alternative plan to accepting a deal with Echostar was to try and prime the first lien debt which Echostar controlled at TerreStar Networks. However, in the end TerreStar has had to take a $75M DIP from Echostar and agree to the restructuring plan which Echostar proposed.
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