August 6, 1999 (wsj.com/section B4)
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'Vultures' Amass $800 Million
Of Iridium's Public Debt
By GREGORY ZUCKERMAN and NICOLE HARRIS
Staff Reporters of THE WALL STREET JOURNAL
NEW YORK -- "Vulture" bond investors have accumulated as much as $800 million of the $1.45 billion of public debt of Iridium LLC in recent weeks, according to Wall Street investors.
These new bondholders are likely to try to pressure Motorola Inc., the largest shareholder in the struggling satellite-phone venture, to keep Iridium afloat and give them an ownership slice of the company. The strategy suggests the funds see value in Iridium and will try to resuscitate the company.
These so-called vulture investors, or those who invest in the bonds of distressed companies in the hope of a turnaround, have flocked to Iridium's bonds even as the company's problems multiplied.
"We've traded large numbers of the bonds in the past few weeks, and there's been a great deal of interest from distressed buyers," said Marc Lasry, managing director at Amroc Investments in New York, a leading trader in distressed bonds.
Among those investors leading the charge into Iridium's bonds has been Windigo Partners LLC, a hedge fund in New York. "There's a real market for Iridium's product and that's why vulture investors have been placing bets on the company," said Gene Fattore, a partner at Windigo. At the end of the first quarter, Iridium said it had 10,294 customers who paid an average of $2 to $7 a minute for international service.
Even as the vulture funds prepare for a showdown, investors who jumped on the Iridium bandwagon early are licking their wounds. "Our bonds have lost 80% of their value. Whenever you make an investment you consider the risk, but no one bargained for this type of loss," said one bondholder, who purchased Iridium bonds in July 1997.
Still, this investor isn't ready to get out of Iridium completely. "There is a market for the service, and it's worth waiting for to see if they can come up with a viable business plan."
Prices for Iridium's shares and bonds have fallen sharply this year amid worries about the company's future. On July 15, Iridium said it would exercise its right to take an extra 30 days to make an interest payment, heightening concern that it would miss the payment altogether. Chase Manhattan Corp. told Motorola on Tuesday that it must guarantee $300 million of an existing $800 million syndicated loan for Iridium, yet another setback.
Thursday, Iridium's shares were at $5.96875, down from almost $50 earlier this year. Prices for Iridium's benchmark 10 7/8 % bonds and maturing in 2005 traded at 22 cents on the dollar, or $22 for a $1,000 bond, Thursday, after reaching as high as $84 earlier this year.
The vulture investors, many of whom bought Iridium's bonds at prices in the low 30s, have purchased the bonds from dispirited mutual funds and other longtime Iridium holders unwilling to bet on a turnaround, said traders.
The vultures now have enough of the bonds to have a meaningful say in the Iridium imbroglio. The bondholders have formed a committee and will likely seek equity ownership in Iridium as part of a restructuring, according to analysts. Such a move could come at the expense of Iridium's current shareholders.
"The vultures that are getting in now have an optimistic outlook" and are hoping to cash in on the restructuring, said Ethan Garber, a distressed-bond analyst at Lehman Brothers Inc. "The Iridium bonds provide arguably the cheapest and most levered way to participate in the growing mobile-satellite industry. They believe that a new Iridium capital structure will provide additional breathing room for the business to execute its plan."
Vulture investors would prefer cash interest payments, but would accept equity in hopes that Iridium stages a turnaround. "The vultures are willing to trade their debt for at least 50% of Iridium's equity because that's all Iridium has to offer," said Mark Kaufman, an analyst at Amroc.
The vultures are hoping to revive Iridium as a provider of satellite-phone services to people doing agricultural, geophysical, mining and construction business in remote areas of the world. Iridium's original business plan called for the company to focus on globe-trotting business people.
"We think there is value in the future prospects of Iridium and we're not focusing on the past as prologue," Mr. Fattore said.
It's a big risk. Iridium was supposed to start a wireless revolution, promising users the ability to make calls in remote places and foreign lands. But the service has been plagued with clunky phones, spotty service and expensive rates.
Francis Ledwidge, a managing partner of Aegis Capital Partners LLC, New York, said he still doesn't know if there is any value in Iridium. He inherited Iridium bonds after acquiring a high-yield fund from High View Capital Corp. in New York, but recently sold the bonds.
"People were placing a lot of faith in Motorola and initially they seemed supportive, but now everyone is trying to negotiate their position and one doesn't know if its jawboning on the part of the companies involved," he said. "It's too much of a risk as far as I'm concerned."
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