TerreStar Networks is facing a court fight with creditors over its reorganization plan, as several classes of creditors have objected to the filing of its disclosure statement, one of the steps towards getting its final plan approved.
A hearing is scheduled for Dec. 10 to approve the disclosure statement, while the final reorganization plan is to be argued in January.
Among the creditors objecting to the disclosure statement are Harbinger Capital Partners, two different groups of unsecured creditors, Sprint Nextel and Solus Asset Management.
When TerreStar filed for chapter 11 bankruptcy in October, its debts added up to $1.2 billion in addition to $400 million in liabilities. According to court filings, the company's financial advisors have pegged the value of the whole enterprise at $1.265 billion.
The debts are $944 million in senior bonds carrying a 15% interest rate, $178.5 million in 6.5% exchangeable notes, and $100 million in a credit line from EchoStar.
Generally, the objections from the creditors' center on whether the company was adequately shopped around before it entered into the current financing agreement with EchoStar, which owns a majority of TerreStar's senior debt. Some creditors asked whether more value could have been extracted from a sale of the company.
The current plan calls for converting 97% of the senior debt to equity, leaving the unsecured debt holders with 3%. The plan would essentially wipe out the stockholders. EchoStar would end up with a majority ownership of TerreStar. EchoStar is already providing $75 million in debtor-in-possession financing which was approved last month by the bankruptcy court, over the objections of several creditors. EchoStar has also guaranteed that it will buy $100 million in preferred stock of TerreStar if it restructures in a backstop plan.
TerreStar, meanwhile, says it was unable to find a strategic partner or buyer, or raise any more capital on the open market. EchoStar, it says, was the only company willing to invest. However, TerreStar announced this week that it is seeking bidders on its assets in addition to pursuing the restructuring plan - in part to satisfy objections that it did not make enough effort to seek a buyer.
Harbinger Capital Partners, which was a major equity investor, has been selling its shares in TerreStar and buying up the exchangeable notes, according to its Securities and Exchange Commission filings. According to people familiar with the matter, the problem is that the restructuring plan proposed by EchoStar accrues too much benefit to a single creditor.
In its objection to the disclosure statement, the firm asks that EchoStar not get any fees if its bankruptcy plan is not confirmed by the court, and that the current plan is unacceptable in any case. EchoStar would get $3 million, the filing says, even if its plan is not confirmed.
Solus Alternative Asset Management, one of the holders of the 6.5% exchangeable bonds, raised the issue of a $32 million intra-company transfer to TerreStar Networks. The objection says is it not clear what the company - TerreStar Holdings - got in exchange and whether the payment came ultimately from Harbinger. The Disclosure Statement fails to explain the consideration that was paid by TSN in return for the $32 million, leaving open the possibility that these transfers could be challenged as either constructive fraudulent transfers or actual fraudulent transfers, or possibly as preferential payments, the filing says.
The Ad Hoc committee of creditors, which owns $273 million of the 15% notes, says it plans to file its own backstop plan. In addition the stock that would replace the current debt is more valuable to EchoStar than to other creditors.
Neither TerreStar nor Harbinger's spokespeople returned calls for comment, nor did attorneys in the case.