LightSquared’s latest proposed debtor-in-possession credit facility constitutes a sub rosa plan, “conceived in bad faith” as a way to force through a reorganization plan that discriminates against the company’s largest secured lender, SP Special Opportunities, according to an objection filed late Wednesday by SPSO.
LightSquared is seeking bankruptcy court approval of a new $1.65 billion DIP facility, priced at L+1,100, with a 1% LIBOR floor, as part of its latest proposed reorganization plan. The new DIP, arranged by joint bookrunners JP Morgan and Credit Suisse, would pay off claims on the company’s two outstanding DIPs, a $72.36 million DIP for LightSquared Inc. and $33.7 million on the recently approved new DIP for LightSquared LP (see “LightSquared may tap new $33M DIP from senior lenders, Ergen,” LCD News, Feb. 4, 2014). About $930 million of the new DIP would be converted into second-lien exit financing, $300 million into a loan for reorganized LightSquared Inc., and about $115 million into new equity.
SPSO, the special purpose vehicle set up by Dish Networks founder Charles Ergen to purchase about $1 billion of LightSquared’s senior debt, is the only major creditor to have voted against LightSquared’s current reorganization plan (see “LightSquared creditors all vote in favor of plan, except for Ergen,” LCD News, March 7, 2014). Although the plan purports to repay SPSO in full, LightSquared is attempting to subordinate SPSO’s claims and repay the fund via a seven-year paid-in-kind note – treatment that SPSO has said is unacceptable.
“The DIP facility, like the unconfirmable plan, reflects the obvious motive of the DIP lenders: protect themselves from the massive risks attendant to being a stakeholder of a company whose assets nobody wants, and that has made no demonstrable progress in obtaining the FCC relief on which its future purportedly hinges,” lawyers for SPSO wrote in their March 12 objection. LightSquared has long maintained that its success as a business depends on FCC approval of its proposed wireless spectrum use, though the latest version of the company’s reorganization plan removes an earlier requirement that the company receive FCC approval before it can exit Chapter 11.
“Instead, the DIP lenders – all of whom currently hold deeply subordinated positions in the debtors’ capital structure and were the driving force behind the plan’s formulation – propose to shift that risk to SPSO, the debtors’ largest secured creditor, by subordinating SPSO’s first lien prepetition LP facility claims to $1.65 billion of debt immediately upon funding of the DIP facility, and ultimately to $2.2 to $3.2 billion of debt (if not more) once the plan becomes effective,” SPSO said. “In contrast, for their “investments” in the debtors, the DIP lenders would receive (a) downside protection in the form of priming or senior liens (under the DIP facility and second lien exit facility) to secure their new money loans, and (b) upside in the form of the reorganized debtors’ equity once the plan becomes effective. Uncomfortable with a legitimate equity investment given the substantial uncertainty about the debtors’ future viability, the DIP lenders orchestrated a transaction that would allow them to have their cake and eat it too.”
Among other things, SPSO argues Judge Shelley Chapman must reject the DIP because it was never marketed, and LightSquared has failed to show that alternative, less onerous financing is unavailable, as required under the Bankruptcy Code. What’s more, LightSquared can’t show that SPSO’s liens will be adequately protected after the company incurs $1.65 billion of priming financing, SPSO says. Under the proposed plan, SPSO is exposed to the risk that the value of its collateral will shrink long before its note is paid off, its lawyers say.
“Leaving aside anything “technical,” the debtors have pursued a plan of reorganization with no back up plan and exhausted all of their liquidity doing so,” SPSO says. “As a result, being a lender to LightSquared these days is anything but a sure thing.”
SPSO and LightSquared are due back in court on March 17 for closing arguments in a related battle over the validity of SPSO’s purchase of LightSquared debt. The hearing had been scheduled for March 12, but was postponed after LightSquared revealed new evidence Monday allegedly showing that Dish Networks was interested in LightSquared’s spectrum as early as 2012. The evidence purportedly contradicts Ergen’s previous testimony that he was interested in LightSquared purely as a personal investment. Ergen spent nearly $1 billion of his own money to make the purchases, via SPSO, buying up LightSquared debt from roughly May 2012 to May 2013. Dish Networks, as a competitor to LightSquared, was barred from making such purchases under the terms of LightSquared debt indentures.
A confirmation hearing on LightSquared’s plan is currently scheduled for March 19. – John Bringardner