Opportunity for distressed debt investors?

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A group of banks and financial institutions have reiterated their desire to sue Phil Falcone and his company, Harbinger Partners Capital, over a pre-bankruptcy loan they provided to broadband company, LightSquared Inc. The lenders alleged in court documents that Falcone and Harbinger, which indirectly owes more than 90% of LightSquared’s outstanding common stock, abused its control over the broadband company. The lenders, consisting of Appaloosa Management LP, Capital Research and Management Company, Cyrus Capital Partners, LP, Fortress Investment Group LLC (NYSE:FIG), Knighthead Capital Management, LLC, Redwood Capital Management, LLC, Silver Point Capital, LP, and Solus Alternative Asset Management LP, formed an ad hoc committee representing other secured lenders. The ad hoc committee sought permission to take legal action and pursue the claims against Falcone and Harbinger.

LightSquared, one of the first companies to offer mobile satellite services in North America, filed for Chapter 11 protection in May 2012 to, among other things, give it time to extend the term of a secured loan of $320 million that the company had used to fund its 4G LTE open wireless broadband network. LightSquared is indirectly owned by Phil Falcone’s Harbinger. When the company filed its first petition in US bankruptcy court in Manhattan, it revealed that Harbinger indirectly owned about 96% of its outstanding common stock. LightSquared Inc. issued 91,878,629 common shares to a subsidiary of Harbinger and 3,387,916 shares to SK Telecom Co., Ltd. (NYSE: SKM). The company also said it had $4.48 billion in assets and $2.29 billion in liabilities as of February 29, 2012. In addition to the $320 million secured loan secured by the parent company, a unit of LightSquared also secured a $1.5 billion pre-bankruptcy loan. At the end of the November 2012 operating period, LightSquared disclosed that it was still illiquid with $211 million in current assets and $2.1 billion in current liabilities.

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Founded in 1985, LightSquared began building its 4G LTE wireless broadband network in 2010 and has already invested over $4 billion in the project. The project has faced opposition from the global positioning system (GPS) industry, complaining that LightSquared’s ground base stations can cause widespread overload interference to GPS receivers and other GPS devices.

The latest legal battle over LightSquared’s pre-bankruptcy debt adds to the company’s difficulty obtaining approvals for its 4G LTE network from the GPS industry and the Federal Communications Commission. In response to the bankruptcy court’s request, Harbinger said the ad hoc committee of secured lenders does not have standing to pursue claims because they can be reimbursed for money owed by LightSquared because the company is valued more than its debts, up to 7 to 12 billion dollars. In addition to the bankruptcy court dispute, Harbinger Capital and Falcone also face lawsuits from the U.S. Securities and Exchange Commission for allegedly defrauding investors.

The LightSquared saga is typical of a bankruptcy case where lenders try to throw away their strength so they can recover what they lost. LightSquared’s future, however, lies in the feasibility of its revolutionary satellite network services, which have been economically and politically difficult to bring into the broadband industry.


Carol M. Barragan