When LightSquared yesterday filed a revised reorganization plan in its Chapter 11 case, it was unclear whether that plan – which contained terms different than those that had been previously disclosed and discussed in court filings and hearings – reflected an evolved version of the consensual agreement reached in the case mediation that was announced last month, or whether it represented a breakdown of that deal and was simply yet another stab at a reorganization proposal by the company and its most senior creditors.
Wonder no more. According to a disclosure statement the company and an ad hoc committee of senior secured lenders jointly filed today with the bankruptcy court in Manhattan, it is the latter.
According to the disclosure statement, “Notwithstanding LightSquared’s good faith efforts to negotiate and file a consensual plan, such plan did not materialize … and it does not appear that the agreement-in-principal reached during the mediation will materialize into a Chapter 11 plan to be filed with the bankruptcy court.”
The disclosure statement continued, “Meanwhile, secured claims against the debtors continue to accrue interest, and the debtors continue to incur administrative expenses that will need to be satisfied pursuant to a plan. With each passing day, the debtor’s ability to successfully reorganize becomes more difficult. Recognizing this fact, the plan proponents propose the plan.”
But if the disclosure statement at least clarifies where the case stands, where it is headed appears as murky as it has ever been.
A status hearing is scheduled in the case for 5:30 p.m. EDT on Aug. 11, and the process moving forward is sure to be discussed. Ahead of that status conference, and in light of this latest proposal, it is perhaps worthwhile to take a look at the recent machinations in the case concerning efforts to negotiate a consensual deal in order to set some historical context.
As is widely known, the key dispute in the case is between LightSquared’s founder and equity sponsor, Harbinger Capital, which is controlled by Philip Falcone, and DISH Corp. founder and owner Charles Ergen, who took advantage of LightSquared’s distressed asset prices in 2012 as it faced bankruptcy to purchase a blocking position in LightSquared’s senior bank debt in order to exert control over the company’s Chapter 11 process. According to a Harbinger lawsuit filed against Ergen, Ergen’s objective was to manipulate the Chapter 11 process to acquire LightSquared and its wireless spectrum on the cheap (see “Harbinger RICO suit against DISH, Ergen over LightSquared seeks $4B,” LCD, July 9, 2014).
Much litigation concerning the legality of these purchases has already occurred in the context of this bankruptcy case (and if Harbinger has its way, more will follow), and while the details are complex, suffice it to say that while Ergen was cleared of technical violations of the indenture governing the bank debt he acquired, sufficient concerns were raised with respect to at least some of his actions that Bankruptcy Court Judge Shelley Chapman found that at least a portion of his debt claim in the case, which Ergen held through an investment vehicle know as SPSO, would be subject in an amount to be determined to equitable subordination.
Still, in her May 8 decision on the validity of Ergen’s claim, Chapman also denied confirmation to the company’s proposed reorganization plan because of its discriminatory treatment of the claim, which proposed to distribute third-lien debt to Ergen and SPSO, as opposed to the cash distribution to other senior lenders.
Chapman gave the parties two weeks to negotiate a new plan, after which she said she would appoint fellow bankruptcy court judge Robert Drain to act as a mediator in the case. (see “LightSquared plan denied; judge gives lawyers 2 weeks to make deal,” LCD, May 8, 2014).
In a result that surprised no one, the parties could not come to terms, and on May 27, Chapman said she would, as promised, appoint Drain as mediator.
In a status report filed with the bankruptcy court on June 27, Drain reported that all key stakeholders in the case, with the exception of Ergen, had reached a deal on a confirmable reorganization plan.
A plan wasn’t filed, but at a status conference held in Manhattan on July 1, the company disclosed the outlines of a proposal under which JPMorganChase, Cerberus Capital and Fortress Investment Group would contribute about $1.75 billion of new money to the company, with the company raising an additional $1.3 billion through a debt issuance. The JPMorgan/Cerberus/Fortress group would receive 74% of the reorganized company, with Harbinger retaining 12.5% of the new equity. The company’s senior lenders, meanwhile, would be repaid in full, in cash, with the exception of Ergen, who would receive $470 million in cash and a $492 million unsecured note, in exchange for his claim (see “LightSquared plan due July 14; confirmation hearing set for Aug. 25,” LCD, July 8, 2014).
Drain’s report, it should be noted, slammed Ergen, saying he did not participate in the mediation “in good faith” and “wasted the parties’ and the mediator’s time and resources.” (see “LightSquared reaches deal on plan; mediator slams holdout Ergen,” LCD, June 30, 2014).
On July 14, however, Drain filed a supplemental report with the bankruptcy court stating that LightSquared had now reached an agreement with Ergen. According to Drain’s supplemental filing, Ergen had “concluded a good-faith negotiation by agreement with the plan sponsors on the key terms of SPSO/Ergen’s treatment under a Chapter 11 plan as well as new funding that is fundamentally consistent with the consensual plan terms previously negotiated by the other parties.”
Details, again, were not provided in the filing, but according to report from Bloomberg, an attorney for a special committee of LightSquared said at a status conference held on July 14 that under the revised deal, the contemplated $1.3 billion of debt financing in the agreed-upon prior deal would now be provided by Ergen, who would convert his senior debt claim, which Ergen had asserted was about $1.3 billion, into $1 billion of new debt, and provide an additional $300 million in new financing. The equity role of JPMorgan, Cerberus, and Fortress was not addressed.
The Bloomberg report did say, however, that Harbinger appeared less than thrilled with the new plan, quoting one Harbinger attorney as saying the Ergen settlement was a “stunning reversal,” and that Harbinger’s position has been that Ergen should not be part of the company’s capital structure after it emerges from Chapter 11.
Leaving that concern aside, however, the company said it would file the revised plan within a week, on July 21. A status hearing was scheduled for July 22.
The new proposal
But no plan was filed on July 21, and on July 22, just hours before the scheduled hearing, the company adjourned the status conference to “a date and time to be determined.” No reason was provided (although the reason is now clear – no deal was reached and it was back to the drawing board).
On Aug. 4, the company filed a notice rescheduling the status conference for Aug. 11, again without explanation, and yesterday, the company filed the proposed reorganization plan (see “LightSquared files revised reorganization plan,” LCD, Aug. 7, 2014).
Under the proposed plan, Ergen’s allowed claim is reduced by another $100 million, to $900 million. Rather than Ergen providing the debt financing, the company’s senior secured lenders, including Ergen, would all receive pro rata shares of a new $1 billion term loan and 100% of the equity in the reorganized company. Ergen and the senior lenders would also back an additional $500 working capital facility for the company that would, among other things, be used to repay the existing DIP facility and provide the company with working capital.
While the debt and equity to be received by Ergen under the plan (designated as Tranche B) would carry certain transfer restrictions not applicable to other lenders, and the equity distributed to Ergen (designated as Class B common) would carry reduced voting power, the economic terms of the distribution would be equal for all senior lenders.
The plan also prohibits Ergen from acquiring any additional debt or equity in the company without the consent of the board of directors.
Harbinger, meanwhile, would not see any recovery under the plan, although the plan does provide for an alternative process under which the company’s equity would be auctioned. According to the disclosure statement, that process is designed “to test the value of the debtor’s assets” in lieu of a valuation of the company, but depending on its results, and based on the terms of the proposed reorganization plan, a sale of the company for more than roughly $3 billion (assuming no debt) could conceivably create residual value for Harbinger.
Last, but not least, the plan further provides that if Ergen and SPSO voted to reject the plan, then Ergen would share in the recovery of debt and stock along with other lenders, but his claim would be treated as a disputed claim, to be litigated by the bankruptcy court, with the ultimate amount of his allowed claim and recovery simply left in Chapman’s hands. Any amount that Chapman determines should be subordinated would not see any recovery.
In addition, the term loan recovery portion for senior lenders in the event Ergen rejects the plan would be increased to $1.2 billion. –Alan Zimmerman