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WILL DES BE FORGIVEN AUCTION DEBT ERRORS?

WASHINGTON-Comments submitted last week by NextWave Telecom Inc. to the Federal Communications Commission regarding proposed changes to the established C- and F-block personal communications services repayment plans smacks of a last-ditch effort to keep a sinking ship afloat.

Couched in terms that could be interpreted as an aim to shame the commission into ensuring the success of “small” businesses that paid for a chance to ride the communications merry-go-round, NextWave’s plan seeks to circumvent every rule the FCC has crafted during the past two years surrounding the C-block auction.

The debt-restructuring issue is so hot that the commission has scheduled a public forum later today to discuss the problems and their possible solutions.

With the help of BT Wolfensohn, a strategic-restructuring division of BT Securities Corp., NextWave submitted its “baseline restructuring plan” to the commission in response to an FCC inquiry on alternative financing arrangements for entrepreneur-block winners. NextWave’s five components that would apply to any C- or F-block licensee include:

maintaining the existing principal obligation to the federal government;

maintaining the existing 6.5 percent interest rate (which would be ratcheted down from the 7 percent reportedly being paid by some licensees);

providing for annual payments in arrears;

permitting licensees for the first eight years to add interest obligations (including interest on unpaid interest obligations) to existing principal balances rather than requiring cash payments;

extending the payment term to 20 years.

The company also asked for changes in control-group and attribution rules.

“This restructuring proposal addresses the financial needs of telecommunications ventures through their natural business life cycle and provides a complete payback to the federal government,” the company explained. “Thus, in the truest sense, this is a restructuring and not a discounting of payment obligations.”

But NextWave is asking for a discount. First, it recommends that the commission even out the interest for all entrepreneurs to 6.5 percent; those now paying 7 percent related to Treasury numbers tied to the dates on which their licenses were granted would receive a substantial discount in their interest payments. If NextWave had been paying the higher rate, it says its additional interest would amount to $200 million.

Another deferral plan floated by NextWave/BT Wolfensohn would extend the current 10-year payback plan to 15 years, but that would require the government to “forgive three years of interest in the early years of the license term.”

Nearly all wireless companies during the last 18 months have taken a hit of some kind from the financial community, be it in reduced stock values or in public offerings that haven’t gotten off the ground. NextWave uses this reality as a weapon as well, telling the commission that Wall Street has rejected financing requests from small-business PCS licensees on the grounds that such debt continues to be subordinated to the FCC under the current rules.

NextWave wants the FCC to release at least 10 percent of the subordinated debt-or the amount paid in to the commission thus far by the C- and F-blockers-so it can be used as collateral in a financial deal.

NextWave recommends that the commission “provide for some level of subordination of the government debt to encourage lenders to extend financing on terms that are as favorable as those provided to A- and B-block licensees,” it wrote. “In the context of vendor financing provided to A-and B-block licensees, vendors are able to secure their financing by the proceeds of a sale of the licenses. NextWave would propose that the commission provide for subordination to the extent of at least 10 percent of a C-block licensee’s aggregate bid, which would equate to the level of proceeds already received by the government.”

The commission has opened itself up for this 10-percent discount request due to its recent agreement with Pocket Communications Inc. and its primary creditor to allow that lender first dibs on the proceeds from Pocket’s 43 licenses, if the bankruptcy comes to that.

“Under a prepayment option, C-block entities could pledge the proceeds from a sale of their franchises as collateral to debt holders and could also avoid the constraint of subordination of all debt to government debt,” it continued. However, NextWave would only support a prepayment option if “the discount will permit financing in the current market environment.”

As a rationale for such a discount, NextWave pointed to the head start the A- and B-block licensees had in getting to market, and that Wall Street excitement over PCS has dimmed substantially since those first auctions. This head start argument sounds faintly familiar, like one that was raised during the cellular industry’s infancy. The commission at that time was lenient with B-block and rural cellular lottery winners, but it did not bend over backward to make sure they survived financially.

NextWave has the option of selling its services during its buildout period via resale agreements with A- and B-block licensees serving its markets-just like B-block cellular carriers did-but no such idea appears in their filing.

When asking for a 20-year payback schedule, NextWave did not explain why it would want to double the payment time for a 10-year license. It only alluded in a footnote that Congress has given the FCC “unlimited discretion to set license terms for all non-broadcast services.”

NextWave lists its accomplishments regarding its buildout efforts-switch agreements, site licenses and pending negotiations-but then rescinds them partially by blaming today’s market circumstances for the continued failure to launch its initial public offering; it also cites the recent Pocket Communications bankruptcy as a factor in its less-than-stellar efforts to gain increased financial backing.

“NextWave has had to throw on the brakes to this forward momentum,” it wrote. “The designated-entity licensees have not been provided the pricing benefits intended by Congress.

“Without a healthy C block, it is unlikely that we will ever achieve what Chairman Hundt recently identified as `the Holy Grail of telecom policy: the substitution of cost-effective wireless communication for wireline telephony.’ “

NextWave apparently forgets the FCC’s party line regarding the success of any entity receiving a license at auction. It revolves around, “We can provide you with the opportunity. We cannot ensure your success.”

Nextel Communications Inc., the nationwide enhanced specialized mobile radio operation that intends to compete with wireline, cellular and PCS companies for a piece of the business and consumer pie, made no bones about its opposition to any commission restructuring, and it based its opinion on the fact that auction players knew-or should have known-what they were getting into when they made their up-front payments.

Following a listing of all provisions made by the FCC to assist small businesses to compete in an auction situation, Nextel then pointed out that “the bids of these C-block `small businesses’ inexplicably `eclipsed the total combined A- and B-block revenues … even though the players in [the A and B] auctions were the nation’s largest telecommunications companies.’ ” The C-blockers were “illogically paying twice as much for [licenses covering] 50 million less pops,” it wrote. “The very licensees that placed irresponsible bids with no discernible basis in a marketplace reality are now seeking forgiveness and rescue from their reckless actions.”

In its comments, Nextel also deflated NextWave’s claims that financial resources were unavailable, citing the fact that it and other wireless licensees have been able to obtain “substantial financing” since the C-block auctions
ended.

“Stripped of their self-serving rationalizations, these proposals seek unwarranted `forgiveness
‘ for irresponsible bidding that subsequently has failed to attract investment,” Nextel wrote. “The proposed debt deferral is inherently and inevitably unfair not only to other auction winners that have already paid their auction bids in full, but also to all participants and investors who relied on the commission’s rules in formulating their auction strategy and participation decisions … The commission is not obligated to rescue irresponsible bidders or guarantee their competitiveness or ultimate success.”

Citing a Hundt comment of its own, Nextel concluded, “Accordingly, as Chairman Hundt has stated, the commission should `go after’ licensees who default on their auction payments, cancel their licenses and re-auction the affected spectrum.”

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