LightSquared investigation deadline extended

Reuters News
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Posted: Aug 14, 2012 4:44 PM
LightSquared investigation deadline extended

By Billy Cheung

NEW YORK (Reuters) - U.S. Bankruptcy Court Judge Shelley C. Chapman this afternoon extended a critical document discovery deadline in the LightSquared <MOSAV.UL> bankruptcy proceedings.

The deadline was extended to September 28 from September 11 in U.S. bankruptcy court, effectively allowing the parties involved more time.

A group of lenders holding over $1.08 billion of secured debt at LightSquared LP, the company's main operating subsidiary, seeks to investigate the propriety of a $279 million loan extended to the holding company for LightSquared last July.

At the heart of the issue is whether this loan constitutes an "insider transaction" that can be challenged, which could result in redistributing economics to other lenders. Harbinger was the key provider of this loan.

Harbinger Capital Partners owns about 96 percent of this holding company, otherwise known as LightSquared Inc, and controls four of six board of director seats.

According to court documents, the LightSquared Inc loan was initially unsecured, but then granted liens in late August for allegedly no additional compensation. Since Harbinger supposedly continued to own the entire loan through August, the opposition lender group believes the transaction was not conducted at "arm's length" and could constitute a preference transfer.

Under bankruptcy law, preference transfers can be invalidated for uneconomic deals benefitting insiders occurring within a year of a company's insolvency.

The loan further carried a 15 percent payable-in-kind coupon. The opposition lenders argue that neither the non-cash coupon nor the high coupon in a low interest rate environment represent market terms.

If these circumstances are true, the LightSquared LP lenders would like to treat the LightSquared Inc loan as equity, potentially shifting economics away from the LightSquared Inc lenders in favor of other creditors.

The opposition lenders had initially asked for a broad range of documents that Harbinger has repeatedly characterized as a "fishing expedition." The document discovery was also supposed to cover mainly non-Harbinger lenders, but since Harbinger was intimately involved in the transaction, the firm is affected.

Harbinger disputes a number of these charges, as it was disclosed in court that $80 million of the loan came from third-party UBS, the agent bank. Harbinger further argues that liens were given in exchange for an additional $15 million of LightSquared Inc term loans needed to make spectrum lease payments at the holding company.

Within the first month of completing the loan, Harbinger also contends that parts of the loan were subsequently sold to Fortress Investment Group and Mast Capital Management.

While Harbinger has claimed that a number of loan documents have been provided to the lenders to put together an event timeline, Judge Chapman did observe that such materials may be insufficient to determine the larger purpose and strategy behind the transaction. In other words, Harbinger may have made the loan to better position itself in a bankruptcy.

Harbinger ultimately believes that LightSquared will produce a restructuring plan that fully repays creditors, rendering a costly investigation unnecessary.

In February, the Federal Communications Commission (FCC) indefinitely suspended LightSquared's attempts to build the land-based portion of the company's wireless network. The FCC ruled that LightSquared's network transmissions were strong enough to significantly disrupt global positioning systems used by a wide range of commercial industries and the military. Confirming a successful exit from bankruptcy would most likely require a favorable FCC outcome.

(Editing By Jon Methven)