LightSquared’s latest turn: Plan “jammed Charlie” as compromise, Phil Falcone says

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Philip Falcone never wanted Dish Networks founder Charlie Ergen in LightSquared’s capital structure, but opted to support a plan that “jammed Charlie” in order to get the company out of bankruptcy as soon as possible, the Harbinger Capital Partners founder testified today in Manhattan bankruptcy court

Falcone took the stand on the final day of a two-week reorganization-plan-confirmation hearing in LightSquared’s long-running Chapter 11 proceedings. Judge Shelley Chapman scheduled closing arguments for May 5 and 6, but did not indicate when she expects to finally approve or deny the plan.

Judge Chapman, meanwhile, has yet to rule on litigation between LightSquared and Ergen’s investment vehicle, SP Special Opportunities, in a dispute at the heart of LightSquared’s reorganization plan. In January, she held a week-long trial to determine whether Ergen improperly acquired about $1 billion in LightSquared senior claims via SPSO. Closing arguments in the dispute ended just two days before the confirmation hearing began, even though Chapman’s final decision in that dispute directly impacts her ability to confirm LightSquared’s plan. (see “LightSquared v. Ergen trial wraps, judge’s ruling yet to come,” LCD News, March 17, 2014).

SPSO is the sole LightSquared creditor opposed to the company’s current plan – based on new financing from Melody Capital Partners, J.P. Morgan, Fortress Investment Group, and Harbinger – but the size of its claims gives Ergen a blocking position, allowing SPSO to veto any plan proposal. The current plan proposes to repay SPSO’s claims in full, but it would do so via a third-lien, seven-year payment-in-kind note, instead of the cash that creditors in the same class will receive.

LightSquared has asked Judge Chapman to dismiss SPSO’s claims altogether, a move Chapman has already said she would not consider, or to subordinate SPSO’s claims and designate its vote. Doing so would effectively guarantee confirmation of LightSquared’s plan.

SPSO has maintained that its debt purchases were all “perfectly legal,” and that it is being unfairly discriminated by the plan. SPSO lawyer James Dugan repeatedly questioned Falcone today about his decision to support subordination of SPSO’s claims. Citing e-mails Falcone wrote last December, Dugan focused on his animosity toward Ergen, evidence that could support SPSO’s argument that subordination of its claims was a punitive tactic, which would render the plan unconfirmable.

“You specifically thought it was a good idea to subordinate SPSO’s debt, right?” Dugan asked Falcone.

“I think it goes above and beyond that,” Falcone replied.

“What you say in your e-mail is, I like [the] subordination plan,” Dugan said.

“It would help the company exit bankruptcy,” Falcone said. “It wouldn’t necessarily do much for me.”

Among other things, Falcone also said in another e-mail Dugan cited that if LightSquared does not eventually receive FCC approval for the company’s proposed spectrum use – a crucial factor in the company’s business plan – he would file lawsuits that would tie up the FCC and the Department of Defense in litigation for the next decade.

Harbinger agreed to various plan provisions that are detrimental to its interests in order to push through a viable plan for LightSquared, Falcone said under questioning from his own lawyer, Kasowitz, Benson, Torres & Friedman partner David Friedman. Among other things, under the current proposed plan Harbinger agreed to give up its right to sue Ergen, the GPS industry, or the FCC on behalf of LightSquared.

After an earlier plan proposal fell apart in December, Falcone testified that he agreed to a new proposal from Melody Capital Partners that would subordinate Ergen/SPSO claims in order to repay the rest of the company’s creditors in cash.

Under the current plan, Harbinger will receive about 36% of the equity in reorganized LightSquared in exchange for its current 80% equity stake and an additional $150 million investment. A call-option gives Harbinger the chance to take up to 45% of the equity for an additional “couple hundred million,” Falcone testified.

LightSquared will run out of operating cash around April 15, when it is expected to exhaust a $33 million debtor-in-possession credit facility the court approved in February. The company is currently working on a new financing agreement with lenders to support the company through the remainder of its case, Milbank partner Matthew Barr told the court this afternoon. Barr said he would file a notice with the court tomorrow regarding a deal on financing by May 31. – John Bringardner





Middle-market PE firm Watermill hires John N. Carr from Lionheart


Middle-market deal maker John N. Carr has joined Watermill Group to evaluate new investments and support strategic initiatives for the private equity firm’s portfolio companies.

He joins from Philadelphia-based Lionheart Ventures, a private equity firm focusing on industrial companies. Carr has also worked at Goldman Sachs, Gomez Inc., J.P. Morgan, and Stroud Consulting.

Carr will be a principal at Lexington, Mass.-based Watermill, joining principals Michael Fuller and Julia Karol, as well as a team of six partners.

Watermill’s portfolio includes C&M Corporation, recycled-paper manufacturer FutureMark Paper Group, stainless-steel tubing maker Fine Tubes, Polaroid filmmaker MultiLayer Coating Technologies, component manufacturer Tenere, and Superior Tube Company. The firm targets companies generating annual revenue of $40-500 million, including distressed situations, challenged industries, complex transactions, and companies at turning points.

In February, Watermill invested in The Plastics Group, which manufactures blow-molded plastics, including large items such as bed frames and portable toilets, and plastic products with complex chemical properties such as the fuel tanks in lawn tractors and generators. Cole Taylor Bank and Medley Capital provided financing for the investment. – Abby Latour

Follow Abby on Twitter @abbynyhk for middle-market deals, leveraged M&A, distressed debt, private equity, and more



Ergen created excuse to pull LightSquared bid, lender witness says

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An ad hoc group of creditors in LightSquared’s Chapter 11 proceedings today expanded on its theory that Dish Networks founder Charlie Ergen purposely withdrew a $2.22 billion stalking-horse bid for LightSquared’s assets, at the last minute, as part of a long-running strategy to acquire the company’s spectrum at an even lower price.

Blackstone Senior Managing Director Steven Zelin, a financial advisor to the ad hoc group, took the witness stand this morning as LightSquared’s two-week reorganization plan confirmation hearing continued in Manhattan. After a contentious and disorganized day of witness testimony from Charlie Ergen on Wednesday (see “LightSquared lenders accuse Ergen of ‘scheme’ in pulling $2.22B bid,” LCD News, March 26, 2014), ad hoc group lawyer Glenn Kurtz today asked Zelin a series of questions outlining his experience dealing with Ergen in both LightSquared’s Chapter 11 and that of another bankrupt spectrum company, TerreStar. (See “TerreStar nets plan confirmation,” LCD News, Feb. 15, 2012).

LightSquared has previously brought up Ergen’s role in the TerreStar bankruptcy, and that of DBSD, to argue that he has a pattern of maneuvering in Chapter 11 cases to acquire wireless spectrum at a discount.

Abandoned bid

The ad hoc group backed a $2.22 billion bid for LightSquared’s spectrum assets from L-Band Acquisition Corporation (LBAC) – a Dish special purpose vehicle originally created by Ergen to acquire LightSquared’s assets – in an auction scheduled for Dec. 11, 2013. Bid procedures for the auction were approved in September, followed by a process of contract negotiation and diligence that Ergen’s lawyers conducted, Zelin testified. “On a number of occasions, [Ergen lawyer] Rachel Strickland clearly expressed to me that Ergen had more money to spend,” Zelin said. Without giving a specific extra dollar amount Ergen was willing to pay, his lawyers said LBAC was willing to spend more money to get LightSquared’s support for the sale, Zelin noted.

As Ergen testified on Wednesday, he and a team of advisors and Dish board members flew from Denver to New York for the auction, where LBAC was willing to spend up to $2.4 billion at auction. The auction was cancelled at the last-minute, however, when LBAC’s team raised a technical issue, the true impact of which they claimed to have discovered that day, “in real time,” Ergen said.

The “technical issue” has been discussed in court numerous times in recent months, but details have been kept largely confidential. References in court records to a “Qualcomm issue” suggest the problem concerns Qualcomm’s development of chipsets for LightSquared handsets and their potential interference with GPS signals. Generally speaking, GPS interference problems helped drive LightSquared into bankruptcy in the first place – the company has lobbied the FCC for several years now seeking approval for terrestrial use of its wireless spectrum, the centerpiece of LightSquared’s business plan. Phil Falcone, founder of LightSquared majority equity holder Harbinger Capital Partners, testified this January that he believes the FCC will approve LightSquared’s spectrum use applications by the end of 2015. If those regulatory hurdles were cleared, Ergen’s financial advisors have pegged the LightSquared’s spectrum value at as high as $8.9 billion. LightSquared’s own advisors valued it as high as $9.8 billion.

Zelin said today the “technical issue” had been revealed in public documents as early as mid-2011, nearly a year before LightSquared filed for bankruptcy protection. LBAC first raised the issue last November, after it had agreed to serve as the stalking-horse bidder at auction. LBAC lawyer Rachel Strickland specifically asked that details of the technical issue be put into a data room for other bidders at the auction, Zelin testified. “It was quite strange,” he said. “I’ve never been in a situation where a stalking horse bidder tried to convince me that an issue like this needed to be disclosed.”

Still, Ergen continued to express interest in the purchase and discussed with the ad hoc group whether it might spend more at auction, Zelin said. But on the day of the auction, when it became clear that a rumored competing bid from Centerbridge Partners had not materialized, LBAC added new conditions to its bid that the ad hoc group would not agree to, and in January LBAC withdrew its offer altogether.

After the fact, Zelin saw documents produced in discovery that showed Ergen’s lawyers at Willkie, Farr & Gallagher drafted a presentation for Dish showing how LBAC could reduce its purchase price if there were no other bidders at auction, he testified.

“Why in the world did he pull the bid if [Ergen] doesn’t mean what he really says, that there’s a technical issue,” Judge Chapman asked Zelin. “How do you explain what’s transpired?”

“He doesn’t want to pay any more for an asset than he has to,” Zelin said. “That’s the simplest explanation I have. When he found out he didn’t have to pay so much, he created a set of circumstances he claimed were brand new, which were in fact not brand new,” he added, referring to the “technical issue.”

GLC Advisors Managing General Partner J. Soren Reynertson took the stand after Zelin, answering questions about the LightSquared valuations he produced for Ergen. Ergen’s team hired GLC five weeks ago, paying $1.25 million in fees for the firm’s expert testimony, Ergen testified on Wednesday.

The confirmation hearing continues Friday with testimony from Omar Jaffrey, a founding partner of LightSquared plan sponsor Melody Capital Partners, and Jake Rasweiler, a technical expert from Sublime Wireless Inc. The witness testimony portion of the confirmation hearing will conclude on Monday, with Philip Falcone. – John Bringardner




Leveraged loan fund inflows dwindle to $257M though streak hits 93 weeks

loan fund flows

Retail-cash inflows to bank loan mutual funds and exchange-traded funds totaled $257 million for the week ended March 26, according to Lipper. Of the total, roughly 3% was tied to the ETF segment.

This is the third-lowest weekly total of the year, and it’s down from $327 million last week and $574 million two weeks ago. Retail-cash flows to the asset class have settled into a lower range following a hot start to 2014. There has not been one week over $700 million since January.

The four-week trailing average dips to $379 million, from $483 million last week and $504 million two weeks ago. Still, the net inflow streak is now at 93 weeks, with a total of $66.5 billion over that span, by the weekly reporters only.

Year-to-date inflows total $6.8 billion, of which $1.05 billion is ETF-related, or 15% of the sum. In the comparable year-ago period inflows were $13.3 billion, with 11% tied to ETFs.

Last year’s full-year inflows totaled $52.3 billion, 10% of which was tied to ETFs.

The change due to market conditions was positive $26.1 million. Total assets stood at $109.2 billion at the end of the observation period, with ETFs comprising $8.4 billion of the total, or approximately 8%. – Joy Ferguson


Chicago Fundamental Investment prices $411.8M CLO via Wells Fargo

Wells Fargo today priced a $411.8 million CLO for Chicago Fundamental Investment Partners, according to sources.

The transaction is structured as follows:

The deal has a two-year non-call period and a four-year reinvestment period.

The manager priced its last CLO in February 2013, also via Wells Fargo.

With CFIP’s deal, CLO issuance in the year to date rises to $21.88 billion across 43 deals, according to LCD. In March, 20 CLOs have priced totaling $10.4 billion. – Sarah Husband


Europe: Leveraged loans compete with high yield bonds for LBO deals

The European credit markets are set to undergo a shift this year, as private equity sponsors sway back towards the loan product to finance buyouts, sources say. The nuances of the loan product and the perception of a highly liquid loan investor base – coupled with the arrival of cov-lite cross-border loans – means the European loan market will be able to compete with its bond counterpart once again.

High-yield issuance has surged in recent years, allowing it to move out the loan market’s shadow, helped by the bond-for-loan refinancing juggernaut as sponsors tapped into the liquid, cheap, and cov-lite financing option offered by bonds.

In 2006 and 2007, bonds accounted for just 16% and 17% of the leveraged finance deal count, respectively. That compares to an average of 50% since 2010. Moreover, last year’s bank-to-bond deal count was 62 – nearly twice the next-largest full-year supply of 36, tracked in 2010. In 2010 through 2013, there have been 150 bank-to-bond transactions for a volume of €51 billion, in a sweeping transition of money from one asset class to another unprecedented in the European leveraged market.

Now, not only has the flood of loan-to-bond refinancings slowed, but market players expect loans to move back into favour versus high-yield when it comes to new buyout situations.

In 2013 loan-only financing was used to back just under 60% (by count) of all M&A financings tracked by LCD across the loan and bond markets, while the popular bond-plus-RCF structure took a 14% share. These annual readings are, respectively, the lowest and highest of the past four years.

So far in 2014 through to March 12, although the pattern of deal flow is still taking shape, loan-only M&A financing has grabbed a 77% share of all deals, while the bond-plus-RCF option is yet to appear.

For jumbo M&A situations such as Numericable, arrangers will want to tap both markets, but away from these the appeal of the loan product is evident again. “The huge driver of supply from 2010-13 has been bank-to-bond, but people are now more constructive on the loan market,” says a banker.

For prospective issuers the loan product offers cheaper financing. The 90-day rolling average yield to maturity at issue on secured bonds is 6.35%, versus 4.5% for TLBs as of March 7. Both are at historically tight levels, and while the spread between the two has narrowed over the last three months, the second half of last year saw the spread at 2.75% (it has been higher once, at 3.12% in the first quarter of 2012), which began to entice issuers to look more closely at loans again.

A key development has been a deeper bid for the loan product. The 2007 loan bonanza was fuelled by CLOs but these subsequently fell away, while banks have been reluctant to lend due to tighter regulation. However, the emergence of more managed accounts and a general pick-up in traditional institutional money have ensured there is no longer a dependence on CLOs for the leveraged loan product.

Even so, the re-emergence of the CLO product adds further comfort that the loan bid is deep and strong. The European CLO market is expected to see at least €10 billion of new issuance this year, versus €7.4 billion last year, and essentially zero during the previous post-crisis years.

“There has been a move away from the dependence on CLOs we saw in 2007,” a banker says. “There is now more traditional institutional money raised, and a new breed of CLO.”

The investor base is hungry for supply, and the €2 billion loan from Ziggo last month highlighted how deep the European market has become – albeit it for a double-B credit. “Ziggo has given sponsors a different perspective on what can get done in loans,” says a banker.

Meanwhile, banks are starting to feel underlent, and are therefore looking to add assets, according to sources. The bond-for-loan trade has resulted in a much larger run-off in bank balance sheets than expected or needed, and interest income is down, sources add. Furthermore, weak corporate M&A volumes mean there are limited opportunities for banks to provide term debt that might carry a premium.

The documentation story

Sponsors have often preferred high-yield over loans in recent years due to bonds being a more flexible asset class with fewer covenants and, in more recent years, a willingness to provide portability.

However, the acceptance of cov-lite on cross-border loans – and its anticipated arrival on at least some domestic European loans – is changing this perspective. With better options for exits available to sponsors, the open repayment aspect of loan financing also looks appealing, sources say, despite the advent of portability language in bond documentation.

“Currently the big trade-off if you go for loans, is covenants,” a sponsor says. “The big advantage of U.S. loans is they are predominantly cov-lite. In Europe, FRNs are comparable to U.S. cov-lite loans, and we can also get portability on bonds. We would, though, look at high-yield very differently in the face of cov-lite loans as you can have the same covenants, but get a pre-payable capital structure at par.”

Another emerging risk to high-yield is the reappearance and acceptance of the first- and second-lien buyout structure. Originators say this format is being heavily pitched in Europe, and add that the second-lien paper is in demand from funds looking for a return boost. This should also allow sponsors to lift leverage, which still remains conservative versus levels seen during the 2007 LBO boom.

Faced with these potential headwinds – which were a recurring theme at last week’s high-yield conference hosted by Euromoney Seminars – bond investors were asked what more they would be willing to give sponsors to keep high-yield attractive. The answer was that high-yield has already gone as far as it should on terms.

Investors cite several key features that have evolved to make the asset class attractive to sponsors, such as the advent of non-call one FRNs, and portability. In addition, they mention restricted payments leverage tests that allow sponsors to take money out of the company at will, as well as making debt incurrence easier.

So flexible has high-yield become that there is talk of sponsors demanding similar terms and features for loans. “Sponsors want loans again. They’re quite cheap, they’re flexible in terms of repayment, and they’re floating. But they’d also like no covenants, plus all the other flexibility that goes with a high-yield bond,” says an arranger. – Luke Millar/Ruth McGavin