New Orders Bolster Loral Stockholders
LORAL SPACE & COMMUNICATIONS SEEMED a few steps closer to exiting bankruptcy court last week, with its reported win of a satellite-construction contract and the scheduling of a July 13 hearing on a reorganization plan. The hearing will be the last chance for stockholders of Loral, a satellite maker, to challenge a plan that would eliminate all of the company's existing preferred shares (ticker: LORBQ.OB) and common shares (LRLSQ.OB), while giving new Loral stock to the hedge funds that bought up Loral's distressed debt.
A ragtag band of Loral Space & Communications stockholders has haunted proceedings at the U.S. Bankruptcy Court for the Southern District of New York, arguing that a recovery in the satellite industry gives Loral enough value to satisfy its creditors and its current equityholders ("What Is Loral Worth?" May 9).
At the confirmation hearing before Judge Robert D. Drain, equityholders will introduce a new argument: They'll ask the judge to eliminate the claims of Loral's most powerful creditors, including hedge-fund manager Mark H. Rachesky. Equityholders will argue that the Loral December 2001 loan guarantees that underlie those claims were a "fraudulent conveyance," in bankruptcy parlance.
Business seems as though it's recovering for New York-based Loral . A report in The Wall Street Journal on Tuesday said the company got its fourth new order of the year, beating Boeing (BA) to a $190 million award to build a spare satellite for XM Satellite Radio Holdings. In its business plan for 2005, Loral aimed for five new orders; it now needs to win one more.
Things Are Looking Up
With a reported award from XM Satellite Radio, Loral's satellite-building business has almost reached its goal of five new deals in 2005. Bankruptcy hearings set for July 13 will test the claims of Loral's bondholders.
Loral Satellite Orders
Customer Date
XM Satellite (unannounced) May '05
ICO Satellite Management April '05
TerreStar Networks April '05
PanAmSat February '05
Echostar Communications December '04
Source: Space Systems/Loral
In February, PanAmSat Holding picked Loral to build a 48-transponder communications satellite. In April, Loral got two orders from competing builders of a new kind of cellular service that will combine satellites with terrestrial base-stations, sometime after 2007.
While the latest order from XM Satellite increases the likelihood that Loral will make its goal for 2005 bookings, the profits from an impressive-sounding satellite order can be hard to value. Loral reportedly won the XM Satellite award with an aggressive price that Boeing refused to match, while also providing vendor financing. And because the cash will flow through Loral's income statement over an extended period, the present value of earnings on a $190 million order is a much smaller number.
In next month's hearings, Judge Drain will hear testimony on a reorganization plan proposed by Loral's management and creditors, which would wipe out existing stockholders and award a windfall stock-option package to Loral managers. Equityholders have argued that Loral's business is worth more than $1.3 billion. But even using the $803 million valuation proffered by Loral and its creditors, the proposed stock options would be $100 million "in the money" from the day of reorganization.
Most of the equity ownership in the reorganized Loral would go to the hedge funds that hold Loral debt. Rachesky's firm, MHR Fund Management, took the lead among Loral's creditors after buying a large chunk of notes that had been issued at $613 million face value by the Loral subsidiary Orion Network Systems. Orion noteholders like Rachesky then elbowed their way to the head of the Loral bankruptcy by invoking a guarantee of the Orion notes that parent-company Loral extended in December 2001.
But in a May 25 court filing, the Loral equityholders' committee hinted at a direct attack on the Orion noteholders' place in the Loral bankruptcy. Drain should void Loral's guarantee of the Orion notes, suggests the equity pleading, as a "fraudulent conveyance" from businesses that were actually insolvent at the time.
A severing of the Orion guarantee would be a stunning setback for noteholders like Rachesky, by confining their recovery to the Orion unit's limited assets. Essential pieces of Orion's satellite service appear to be owned by Loral , not the subsidiary. In a Tuesday filing, Loral insisted its guaranty is a direct obligation from Loral to the Orion noteholders and shrugged off the equityholders' critique of the guaranty as "incomprehensible."
The warring parties in Loral's bankruptcy will present their arguments more clearly in filings that precede the confirmation hearings. If equityholders try to cut off the claims of powerful hedge funds, those hearings could be quite entertaining.
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The above Barron's article 6/5/05 culled from YMB. |
