*DJ Newswires. Iridium, Plagued By Debt Woes, Seen Near Bankruptcy
June 25, 1999
By PALLAVI GOGOI
NEW YORK -- Time is quickly running out for Iridium LLC (IRID).
The beleaguered Washington, D.C.-based satellite phone company is
suffering under the weight of its enormous debt load. And many observers
expect Iridium to be forced into bankruptcy soon.
Earlier this month, C.E. Unterberg Towbin analyst William Kidd noted in a
research report on Iridium that 'bankruptcy is more than within the realm of
possibilities.'
Indeed, the firm faces a July 15 interest payment on $1.45 billion in debt due
to bondholders. If Iridium can't come up with the $90 million it owes, which
seems unlikely considering it had only $195,000 in cash revenues as of early
April, the company can get an extension until Aug. 15.
However, Iridium did have 'cash and cash equivalents' of $195.4 million at
the end of the first quarter, regulatory filings show. Iridium officials declined
to provide a breakdown of cash versus 'cash equivalents,' which are typically
short-term, easily marketable securities.
But even Iridium's backer and 18% shareholder, Motorola Inc. (MOT),
warned in a recent Securities and Exchange Commission filing that the
satellite enterprise's financial problems could ultimately 'result in Iridium's
bankruptcy.'
The two most probable options facing Iridium are filing for bankruptcy
protection, or placating irate bondholders.
In either scenario, Iridium faces serious challenges in trying to restructure its
debt. While the company has dismissed the bankruptcy option, it has
solicited a band of debt holders to join a steering committee to negotiate the
restructuring process.
Committee members will be restricted from trading Iridium's junk bonds and
can only periodically update fellow bondholders about the process.
'But there are too many disparate groups that have opposing interests,' said a
person familiar with the company's debt. That would make it difficult for the
company to compel the majority of investors to agree to any terms.
Indeed, one of Iridium's largest bondholders told Dow Jones Newswires that
it didn't volunteer to be part of the negotiating committee because of the
restrictions.
Working against Iridium, however, is the fact that many vulture funds bought
the firm's junk bonds on their way down - especially between 18 cents to 50
cents on the dollar. These funds, which are likely be on the restructuring
committee, now hope to force the company to either pay the full principal or
exchange the debt for a controlling equity stake in the company.
Lenders have retained a pair of high-powered firms, both of whom attended
an investors' conference call Tuesday. The firms are Weil Gotshal & Manges,
a law firm specializing in bankruptcy restructuring and Houlihan Lokey
Howard & Zukin, a Los Angeles-based investment bank that specializes in
restructuring bankrupt and distressed firms.
The presence of these firms, observers said, is an early indication of how
ferocious the negotiations could be.
'It's going to be a head-to-head battle between Houlihan Lokey and DLJ,'
said one analyst.
Iridium has hired Donaldson Lufkin & Jenrette as its financial adviser for the
restructuring process. Weil Gotshal, Houlihan Lokey and DLJ didn't return
phone calls.
Iridium wouldn't comment on the restructuring process, but spokeswoman
Michelle Lyle said the company will make a preliminary announcement by the
end of June or early July.
CEO Says Bankruptcy Not 'Viable' Option
Lenders are likely to urge Iridium to declare bankruptcy because its assets
would be liquidated to pay debt holders.
But so far, Iridium's new chief executive John Richardson, who took over in
April, has dismissed bankruptcy saying: 'It's not a viable option.'
'I tend to believe the company on that,' said Marcus Jones, high-yield
telecom analyst at Moody's Investors Service. 'It would probably impair the
recovery value for both bankers and bondholders.'
Nonetheless, the outlook for Iridium is bleak, primarily because it has no
readily apparent sources of revenue. Iridium has already tripped bank
covenants on its $800 million credit facility.
Iridium's secured bank facility included a condition that by March 31, the
company have cumulative cash revenues of at least $4 million, cumulative
accrued revenues of at least $30 million, at least 27,000 Iridium world
satellite service subscribers and at least 52,000 total subscribers.
Iridium was not able to meet any of the requirements. In an April filing with
the SEC, Iridium said it had $195,000 in cash revenues and $1.637 million
of cumulative accrued revenues. By March, the company had only 7,188
world satellite service subscribers and 10,294 total subscribers.
Banks have extended the compliance deadline several times. Iridium's next
deadline is June 30.
At this point, banks are unlikely to extend Iridium more credit. And
Motorola - which has already sunk some $2.5 billion into Iridium, according
to analyst estimates - doesn't appear willing to bail the satellite business out of
its cash crisis.
Janilee Johnson, a Motorola spokeswoman, said that while the company
plans to continue offering 'operational support' to Iridium, 'we have not
committed any more funds yet.'
Johnson added that Motorola is 'working with other Iridium partners on the
restructuring process.'
Iridium could also find it difficult to raise money on Wall Street. The bond
and equity markets may not be receptive considering several shareholders
have filed suit against the company, while bondholders are already irate at the
prospect of not being paid the interest due to them.
Adding to all the company's woes is the fact that some doubt that the firm's
business plan will work.
'The seeds of doubt have been sown more deeply by Iridium itself,' said
Jones of Moody's. 'Its early problems have just proved that the market,
especially one of size, for satellite telephony may not exist.'
New And 'Improved' Business Plan
Despite the myriad of problems, Iridium may have some things going for it.
The company is under new management, and it has already cut prices,
slashed costs in every area possible, and laid off personnel.
'These cuts could be tremendously beneficial to the company. But the one
cloud that hangs over them is the financial uncertainty,' said Les Levi, telecom
analyst at Chase Securities.
Iridium also plans to get more customer-friendly phones from Motorola by
December [Unbelievable. 12/99 after G* starts service...] and focus on industrial users, such as oil companies and
fishermen. But analysts are unsure if that market segment can attract enough
subscribers.
The challenge now is for Iridium's new management to convince the hard
core vulture fund investors that its new and improved business plan is likely to
succeed.
Jones of Moody's, however, pointed out that even the 'new' management is
hardly fresh blood.
'It's the same company people wearing new hats,' Jones said. 'With the
problems plaguing them, they haven't been able to attract outside
management.'
Indeed, the new CEO Richardson was earlier head of Iridium Africa and
Leo Mondale, the new chief financial officer, earlier held the post of senior
vice president.
One buy-side analyst said the company might try to persuade bondholders to
exchange existing cash pay debt for zero coupon bonds and add some equity
compensation. That would eliminate Iridium's $400 million yearly interest
expense. 'Basically, everybody has to share the pain,' Moody's Jones said.
-By Pallavi Gogoi;201-938-2122; Pallavi.Gogoi@DowJones.com
(Corrected 5:13 PM)
Briefing Book for: IRID | MOT
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