With recovery imperiled, LightSquared creditors turn on Dish’s Ergen

January 21, 2014

You have to say this for Dish Network founder and corporate governance poster boy Charles Ergen: He has made corporate swashbuckling fun again. For reporters, at least. Less so for his onetime allies on the secured creditors committee of the bankrupt wireless satellite company LightSquared, whose prospects for a full recovery dimmed earlier this month when Dish officially pulled its $2.2 billion bid for LightSquared’s spectrum licenses. The creditors committee had previously supported Dish and Ergen when they were fending off a competing plan for LightSquared by Philip Falcone’s Harbinger Capital; after all, Ergen is one of their own, as the largest holder of LightSquared debt. But now they’ve had quite enough of the Dish founder. On Monday, the creditors’ lawyers at White & Case filed a brief asking U.S. Bankruptcy Judge Shelley Chapman of Manhattan to force Dish to follow through with its LightSquared bid – and to reserve their right to sue Dish for damages.

This latest shakeup in the LightSquared Chapter 11 aligns the senior creditors with the beleaguered company, which is in the midst of litigation to disallow Ergen’s billion-dollar claim against the LightSquared estate because he allegedly acquired the company’s debt illegally. Judge Chapman spent the last week hearing testimony about Ergen’s debt purchases from Ergen, Falcone and various henchmen on both sides. (A highlight: Ergen testified that Dish’s treasurer advised him on his LightSquared acquisitions not because the debt purchases by an Ergen personal investment vehicle would eventually help Dish get control of LightSquared assets but because the treasurer is Ergen’s protégé and welcomes any opportunity to learn from the boss.) On Wednesday, the secured creditors will get their turn to bash Ergen and Dish, at a hearing to determine whether Dish may withdraw its stalking horse bid for LightSquared spectrum assets. If Chapman rules that Dish is permitted to pull out, LightSquared will have no live bids for its assets.

The secured creditors – who would be paid in full under the $2.2 billion deal Dish had offered but has now withdrawn – argue in their new brief that when Dish induced the committee to support its request for bid protection, Dish agreed to make its offer irrevocable until Feb. 15. Debtholders assert that the Feb. 15 cutoff was codified in the bid procedures order Judge Chapman entered last Oct. 1, establishing Dish as the stalking horse bidder in the auction for LightSquared assets and providing a $51.8 million breakup fee if Dish were outbid. The committee’s brief accuses Dish of reneging on its promise in an attempt to sweeten deal terms, now that competing LightSquared bids have fallen through and the company is “essentially out of cash and teetering on the verge of administrative insolvency.”

Dish’s lawyers at Sullivan & Cromwell and Willkie Farr & Gallagher haven’t yet responded to Monday’s filing, but they gave a preview of the company’s arguments in a brief last week that countered the creditors committee’s opening salvo. Dish’s position: The agreement it signed with the secured creditors was premised on LightSquared’s Chapter 11 hitting various milestone dates, and despite Dish’s best efforts, the case didn’t meet those deadlines. According to Dish, it has every right to walk away from a deal whose terms weren’t met. Dish also insists that Judge Chapman’s bid procedures order required its bid to remain live through Feb. 15 only if a competing bidder emerged with a better offer. Under Dish’s reading of the order, it’s not bound by Judge Chapman’s terms because there are no other bidders.

Debtors and distressed debt investors should be paying attention to the technicalities of Dish’s agreement with the secured creditors; if Dish is permitted to wriggle out of its stalking horse bid, future creditors committees should be sure to protect themselves against a similar eventuality.

For the rest of us, it’s fascinating to speculate about exactly what sort of game Ergen and Dish are playing. Remember, Ergen’s got almost a billion dollars of his own money at stake in LightSquared – more than any other single member of the secured creditors committee that’s now threatening to sue him and his company. Assuming that LightSquared fails in its attempt to subordinate Ergen’s debt, he stands to lose more than any other creditor from Dish’s reversal on LightSquared spectrum licenses. Meanwhile, the value of those licenses is more questionable than ever. On Friday, the Federal Communications Commission filed a statement in the LightSquared Chapter 11, indicating that it cannot provide assurances that it will complete its review of “spectrum management issues” related to LightSquared’s licenses before the end of 2014. You can see why LightSquared’s creditors are so worried about Dish walking away.

Is Ergen really willing to chalk up his personal investment in LightSquared as a mistake? Dish, after all, has other spectrum-acquisition options, including an upcoming government auction in which the company has announced its intention to bid. Dish’s minority shareholders have been agitating for months (as you know if you’ve been following my coverage of their case) about the possibility that Dish agreed to pay too high a price for LightSquared in order to cover Ergen’s position. Ergen has always responded that his interests are identical to Dish’s because his fortune is in Dish shares. Dish’s willingness to abandon its LightSquared offer and leave LightSquared creditors – including Ergen – without a live bid for assets of apparently declining value sure seems to support Ergen’s assertion that what’s good for Dish is good for him.

I, for one, will be gravely disappointed if the Ergen/Dish/LightSquared saga ends with Dish simply abandoning its bid to the detriment of its founder. I’m counting on the billionaire Ergen to be more devious than that.

(Reporting by Alison Frankel)

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