After defaulting on both its $800 million senior secured credit facility and its $750 million guaranteed credit facility last week, Iridium L.L.C. filed for voluntary Chapter 11 bankruptcy protection.
Iridium said the move has the support of banks, bondholders and its strategic partners, and was not altogether unexpected.
Last Wednesday, Iridium announced it again had failed to reach the subscriber and revenue minimums stipulated in its loan covenants, causing it to default on its bank loans. Wednesday’s deadline marked the end of the third extension given Iridium to meet subscriber and revenue growth targets needed to borrow additional funds from lenders.
Iridium and its banks have been in ongoing negotiations to restructure Iridium’s debt since Iridium missed the original covenant deadline at the end of March. The lack of any further extension in effect forced both to finish the process, and bankruptcy was the chosen result.
Iridium noteholders on Friday threatened to file suit to force the mobile satellite service provider into bankruptcy, which Iridium avoided by voluntarily doing so. Iridium also faced an Aug. 15 deadline to make a $90 million interest payment on $1.45 billion in bonds.
Tim O’Neil, analyst at SoundView Financial Group in Stamford, Conn., said playing the bankruptcy card proves most beneficial to Motorola Inc., which owns 18 percent of Iridium and guaranteed the $750 million credit facility now in default.
“This could be a part of Motorola’s negotiating stance. It allows Motorola to negotiate from a position of strength rather than a position of weakness,” he said. “Motorola does have the strongest vested interest to keep Iridium as an organizational concern. Debtholders would look to Motorola to make good on its promises to (guarantee) current as well as ongoing operating expenses.”
Bankruptcy protection guards Motorola from these claims and allows it to help Iridium restructure its debt without the added pressure of creditors demanding payment.
Iridium said it will continue operating and selling the network during the bankruptcy process, and Motorola said it will continue its full operational support for the company.
“We are encouraged by Iridium management’s decision to pursue this course for restructuring the business,” Motorola said in a statement. “Given the progress being made to date to restructure Iridium’s capital structure, we are optimistic that a restructuring plan can be accomplished within 30 days.”
While the company committed to providing technical, sales and marketing support to Iridium during the process, Motorola fell short of promising added investments.
“Motorola’s willingness to participate in providing additional financial support to Iridium continues to depend on a substantial degree of participation in a financial restructuring by all other relevant parties with a significant financial interest,” it said.
The big question now is how the company reorganizes. O’Neil suggested Motorola take an even stronger role in Iridium’s future.
“Ultimately, it makes sense for Motorola to take the whole thing inside and run it as a business unit without the overhead of a worldwide marketing plan and focus on markets it has had success in, such as the government, which happens to be a large Motorola client anyway.”
The U.S. government bought a $30 million gateway, located in Hawaii, solely dedicated to government use and also has special contracts with Iridium North America, which owns a gateway in Arizona. The government contracts with Motorola also call for several thousand units on the system.
“Motorola must feel some obligation to ensure this program continues with the world’s largest communications customer-the U.S. government,” O’Neil said.
That the restructuring is expected only to last a month is important, as time is definitely a factor. First, Globalstar L.P. plans to launch service next month, so Iridium will have a competitor. Also, Iridium has pushed its system as a viable communications solution to potential impending Y2K problems. While technically the Iridium system will remain a Y2K alternate, few businesses are likely to adopt it if the company remains in bankruptcy. Therefore, Iridium needs to emerge from Chapter 11 protection in the next several months if it wants to take advantage of its Y2K edge.
“If there is a potential for Iridium, it’s the government, but also the Y2K issue as a backup,” O’Neil said. “In this state of financial flux, no one will buy it even as a backup solution. This puts out that little flicker of hope. It has to emerge from bankruptcy before 2000 if it wants to capitalize on the Y2K edge.”
ICO update
Other MSS providers have encountered financial investment difficulty, partly due to uncertainty toward the mobile satellite space derived from Iridium’s problems.
ICO recently modified the alternative to its financing plan. The company initially held a rights offering, which-after three deadline extensions-was canceled because it did not get the minimum $500 million subscribership. ICO on July 27 proposed creating a new set of class B stock at $5 each and $75 million in convertible subordinated debt notes to attract a total of $600 million in investments.
“We did not get the binding subscriptions for the class B shares or notes to meet the $600 minimum,” said Joe Tedino, ICO spokesman. Several strategic investors, including Hughes Electronics Corp., are considering a modification to the class B share plan at a lower minimum subscriber threshold and substantial deferment of amounts payable this year to ICO suppliers, Tedino said. The modification is up for review at ICO’s next board meeting Aug. 28.
Tedino said ICO would not comment on an Aug. 12 Wall Street Journal story that said Hughes and other investors have offered to contribute $600 million to the company.
