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Loral Creditors Prepare To React

By | August 4, 2003

      Unsecured creditors of Loral Space and Communications [PNK: LRLSQ] are organizing in anticipation of the company’s next steps after its July 15 Chapter 11 bankruptcy protection court filing.

      Creditors have taken a number of steps to prepare for a potentially lengthy process that will determine what fraction of their investments in Loral can be recouped. Thus far, the creditors have picked a committee, chosen Jefferies Group as their financial advisor, and named the law firm Akin Gump Strauss Hauer & Field as their legal advisor.

      Elected to the creditors committee are two hedge funds, MHR Fund Management and P. Schoenfeld Asset Management, as well as the investment firm Mackay Shields, Finmeccanica’s Italian satellite manufacturing arm Alenia Spazio, and Mitsubishi Electric, a manufacturer of equipment used in space development and satellite communications.

      The creditor’s trustees, Bank One Trust and HSBC Bank, were pre-determined by contract language when the Loral’s indentures were underwritten. Both Bank One and HSBC also are on the creditors committee.

      With seasoned bankruptcy professionals now positioned to aid the creditors, they are readying themselves for Loral’s submission of a plan of reorganization. Once a plan is submitted, the creditors and other stakeholders in the bankruptcy proceedings will be able to respond.

      The banks that are owed roughly $1.1 billion by Loral will be paid in full with proceeds from Loral’s planned sale of its North American assets to rival satellite operator Intelsat, according to creditors interviewed by SATELLITE NEWS.

      The roughly $1.4 billion of non-bank debt that Loral will still owe after it exhausts the roughly $1.1 billion in cash it expects to receive from Intelsat consists of:

      • $700 million in unsecured Loral Orion liabilities;
      • $350 million in unsecured 9.5 percent senior notes at Loral Space; and
      • $350 million in other payables.

      Creditors of the Loral Orion debt are better positioned than those who have either the $350 million in senior notes or the $350 million in other payables because the Loral Orion debt is backed by in-orbit satellites that Loral’s satellite operating unit, Loral Skynet, would retain, creditors said. That debt was incurred in 2001 when Loral obtained an interest rate of 10 percent to pay off borrowed funds with higher interest rates, they added.

      The $1.1 billion all-cash price Intelsat has agreed to pay for Loral’s six satellites and orbital slots is subject to certain price adjustments related to Loral’s ability to achieve specified operating parameters prior to the closing, according to an 8-K document Loral filed July 15 with the Securities and Exchange Commission. The four in-orbit satellites involved in the sale are Telstar 4, Telstar 5, Telstar 6 and Telstar 7, while the two yet-to-be-launched satellites are the Telstar 8 and Telstar 13.

      The sale is conditioned on an auction by the bankruptcy court, the assets continuing to meet certain operating requirements, approval of the deal by the Federal Communications Commission (FCC) and certain other closing conditions. The auction process will be conducted to ensure Loral receives the highest possible bid for those assets.

      Loral also filed an insolvency proceeding in the Supreme Court of Bermuda, where the company is incorporated. KPMG will oversee the reorganization of Loral’s businesses under the control of its board of directors and under the supervision of the U.S. bankruptcy court and the Bermuda court.

      A bankruptcy court hearing to consider procedures for the sale of the Loral satellites has been set for Aug. 18. Loral’s legal counsel in the bankruptcy proceedings is the law firm of Weil, Gotshal & Manges, while the Sullivan & Cromwell law firm is representing Intelsat in the proceedings.

      Meanwhile, Loral is continuing its normal business operations and customer service, with the same management team and organization.

      The company intends to reorganize around its satellite manufacturing operations and its remaining fleet of five satellites that would serve growing markets in South America, Europe and Asia. This plan would allow Loral to go forward as a ” viable enterprise” with opportunities for future growth — an outcome the company believes is in the best interests of its customers, suppliers, employees and creditors, officials said.

      The decision to proceed with the sale of Loral’s North American satellites and to reorganize under the protection of Chapter 11 resulted from a confluence of events that severely affected Loral’s financial performance in recent years. These events include overcapacity in the existing global satellite universe, the collapse of the capital markets, and a significant reduction in demand from telecommunications providers, particularly from Internet-related companies.

      If Loral emerges from bankruptcy reorganization as expected, the company would be unencumbered by a heavy debt burden. The Chapter 11 process would allow Loral not only to sell its North American satellites, but it will also help the company reduce debt and reorganize around its ongoing satellite manufacturing and fixed satellite service operations. – Paul Dykewicz

      Potential Issues For Creditors:

      • Are there any consequences from the planned sale of Loral’s valuable North American assets to Intelsat?
      • How will Loral Chairman Bernard Schwartz restructure the company?
      • Are there implications for Loral creditors from the failure of Globalstar, a joint venture mobile satellite service backed by Loral that is currently under bankruptcy court protection?

      Source: Loral creditors

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