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LightSquared case opens amid skepticism from creditors

by Chris Nolter | Published May 16, 2012 at 1:17 PM

The opening of LightSquared Inc.'s bankruptcy case on Tuesday, May 15, foreshadowed some of the battles that lie ahead for Philip Falcone's wireless broadband outfit.

The wireless broadband provider received interim approval to maintain its cash management systems and other procedural matters. Tensions flared with creditor groups over the regulatory impediments facing the company and the dynamics in its base of debtholders.

Backed by Harbinger Capital Partners, LightSquared operates a satellite communications network and has tried to start up a wholesale wireless broadband business. The New York company has about $2.3 billion in liabilities.

The Federal Communications Commission in February withdrew support for a waiver that would allow LightSquared to offer traditional wireless service, undercutting Falcone's plan.

LightSquared's debts include $320 million in secured debt outstanding at LightSquared Inc. and $1.7 billion of a secured facility at the company's LightSquared LP unit.

The company could not reach an agreement with a group of "LP" debtholders over its use of cash that is marked as collateral. The company has $190 million in cash at the LP subsidiary.

Debtor's counsel Matthew Barr of Milbank, Tweed, Hadley & McCloy LLP told U.S. Brankruptcy Judge Shelley Chapman for the Southern District of New York that the company had made progress in talks with the "Inc." creditors over the use of cash collateral, but not with the "LP" group.

Without drawing on encumbered cash, LightSquared said it could operate until the first week of July.

LightSquared hopes to reach a consensual deal but said that creditors requested too much protection for an interim use of the cash. The company is prepared to litigate over whether there is an adequate equity cushion to protect the secured debt, Barr said at the hearing.

Representing a group of "LP" secured debtholders that opposed the cash collateral motion, White & Case LLP lawyer Thomas Lauria said at the hearing, "Today there isn't really a business, there is a vision of a business." He suggested that the company could consume the $190 million in cash at the LP subsidiary before it won over the FCC.

Chapman suggested that the conflict and uncertainty about the business might be part of "a good old-fashioned Chapter 11" case.

Lauria said the prospect was "more like walking out on a plank than crossing a bridge." LightSquared's equity holders would need "a grand slam home run" from its regulatory and legal predicament to have a positive outcome in the case, while the secured lenders would need just a "single or a double."

Chapman would consider the cash collateral question at a June 11 hearing if the parties cannot reach a deal.

LightSquared and the "LP" group also clashed over proposed trading restrictions.

Milbank's Karen Gartenberg said that LightSquared wanted the restrictions to preserve the right to apply $1.5 billion in net operating losses against future tax bills, should it incur them. The NOLs could be jeopardized by a change of control.

Lauria said that LightSquared is an atypical case, in part because the debtor sought trading restrictions on secured facilities, not bonds.

It is not clear that the company would even propose a reorganization plan that would exchange debt for equity, he added. The debt changing hands could already have crossed the threshold that would cause a change in control through an equity exchange, Lauria argued.

The motion would put an "untenable" risk on the holders of the loans, the lawyer said. An FCC decision or other developments could cause the debt to crash while trading was restricted.

"I'm not going to play on those terms," Chapman said. Discounting the likelihood that "a satellite is going to fall out of the sky tomorrow," the judge said that the balancing of harms dictated interim approval of the motion.

Chapman will hear the matter at a May 29 hearing. The judge wanted to hear the dispute after the creation of an unsecured creditors' committee, which is scheduled to be formed on May 23.

Michael Stamer of Akin Gump Strauss Hauer & Feld LLP represents the U.S. Bank National Association, which is the administrative agent to the "Inc." facility.

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LightSquared case opens amid skepticism from creditors

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