Ergen Loan Debt Claim for LightSquared Subject to Subordination, as Judge Calls for New Restructure Plan
A New York federal bankruptcy judge subjected Dish Network Chairman Charlie Ergen’s nearly $1 billion loan debt claim for LightSquared to subordination, and decided to give the parties until May 27 to develop a new restructuring plan. Judge Shelley Chapman rejected Harbinger Capital Partners’ plan to repay Ergen and his SP Special Opportunities (SPSO) entity with a seven-year note, a satellite industry professional said. If the parties can’t reach a solution, negotiating will continue under mediation, he said. Chapman didn’t issue a formal order.
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LightSquared preferred a standalone plan with Fortress Investment Group, Harbinger, JPMorgan Chase and Melody Capital Partners (CD Jan 10 p7). Dish pulled its $2.2 billion bid for the company this year during a January hearing in bankruptcy court on Harbinger’s complaint alleging that Ergen fraudulently obtained LightSquared debt (CD Jan 10 p7).
In the standalone plan, Harbinger was seeking relatively extreme treatment for Ergen’s claims, said Felix Wai, a New Street Research analyst. “I think it’s more of an expected outcome,” rather than a setback for LightSquared, he said: “I think there was an expectation that the plan would get renegotiated given the treatment that they were seeking for Ergen’s claims.”
The outcome is not a significant “backpeddling” or “backstep” for LightSquared, the satellite industry professional said. It’s more of a shot at Harbinger, Harbinger CEO Phil Falcone and Ergen, he said. The judge said that Ergen’s debt should be subordinated, he said. Chapman also argued that Harbinger can’t treat Ergen unfairly by giving him a seven-year note, while all other investors receive cash, especially when it’s unclear whether the FCC will approve LightSquared’s modification proposals that are pending at the commission, he said. While a lot of the other equity sponsors were getting better deals, it was because LightSquared’s preferred group of investors thought that Ergen wasn’t buying the debt for himself personally, he said.
"We are pleased that the Court agreed that a plan premised on unfair discrimination could not go forward,” said Rachel Strickland, an Ergen attorney, in a statement. Ergen “remains optimistic that a constructive path can be achieved to bring LightSquared out of bankruptcy and enable it to continue as a going concern,” she said. Harbinger didn’t comment.
The judge’s action appears to be a clear invitation to LightSquared and Harbinger “to buy SPSO out of the capital structure if they are prepared to wait around for FCC approval,” independent analyst Tim Farrar said in a blog post (http://bit.ly/1bWdRKi). In that case, the main subject of negotiation would be the amount paid to SPSO for its debt, and whether that’s acceptable to Ergen and “viable for LightSquared to raise in addition to the amount already contemplated in the reorganization,” he said. It’s highly unlikely that Ergen would have been prepared to accept less than the $700 million he paid for the debt, “but if the potential damages in the form of subordination are relatively limited ... he is still likely to be in a very strong position,” Farrar said. “Elimination of Harbinger’s position would be equally unacceptable to Falcone, and thus it seems rather unlikely that agreement will be reached in the next couple of weeks.”