Chapter 11 Filing Gives Intelsat Leverage in C-Band Auction
Intelsat has positioned its filing for Chapter 11 bankruptcy protection as a move that will give the company liquidity to support clearing the C-band spectrum — but it’s possible that bankruptcy proceedings could put the auction at risk.
Intelsat and some of its subsidiaries filed on Wednesday in the U.S. Bankruptcy Court for the Eastern District of Virginia, Richmond Division. Intelsat, which operates a fleet of about 50 satellites, had approximately $14.7 billion principal in outstanding third party debt at the end of 2019, according to the company’s most recent 10-K filing with the Securities and Exchange Commision.
The company’s upbeat “Intelsat Onward” announcement made clear that its desire to receive accelerated relocation payments for clearing C-band spectrum was a factor in filing. Intelsat is eligible to receive the largest share, $4.87 billion, about half of the total payments. Intelsat said it needs to spend more than $1 billion on clearing activities, which must start immediately, and costs will not be reimbursed until later.
The FCC approved the use of accelerated relocation payments when it approved the order calling for a public auction for C-band spectrum in February. Satellite operators are required to clear the mid-band spectrum so it can be made available for 5G. They will receive both compensation for the cost to relocate the spectrum and accelerated relocation payments to incentivize them to clear the spectrum quickly, up to $9.7 billion total.
An FCC spokesperson said Thursday that the Commission “appreciates” Intelsat’s statement of its desire to participate in the accelerated spectrum clearing. “We will continue to move forward with the C-band auction process and look forward to working with satellite operators, wireless companies, and others toward that goal,” the spokesperson said. The auction is set to start Dec. 8.
But it’s possible that the bankruptcy proceedings could hinder Intelsat’s clearing of the C-band.
Attorney Owen Kurtin of Kurtin PLLC believes that the Chapter 11 filing gives Intelsat leverage over the FCC and its creditors. Kurtin cites a 2003 case FCC v. NextWave Personal Communications, in which the U.S. Supreme Court held that under section 525(a) of the U.S. Bankruptcy Code (11 U.S.C.), the FCC could not revoke the spectrum license of a bankrupt licensee of that spectrum just for failure to make timely payments of the license fees.
“Right now, the FCC cannot just revoke [Intelsat’s] spectrum without the bankruptcy court saying it’s OK. And probably, the bankruptcy court is not going to say it’s OK right away,” he said. “There’s a stay in effect and the FCC cannot revoke Intelsat’s licenses. So they can’t auction those licenses.”
Kurtin said there are “infinite possibilities” for what may be going on or being contemplated under the radar, and what is possible in terms of concessions from the FCC or Intelsat’s creditors.
There have been reports for the past few months that Intelsat was taking action moving toward bankruptcy because of the C-band auction. In February, before the FCC published its draft C-band order, Bloomberg Law reported that Intelsat had hired Kirkland & Ellis to consider a possible Chapter 11 bankruptcy if U.S. regulators did not increase the company’s compensation for C-band spectrum. Intelsat’s bankruptcy release indicates that Kirkland & Ellis is serving as counsel.
And later in February, after the FCC’s draft order was released, David Tepper, President of Appaloosa LP, which owns approximately 7.4% of Intelsat’s common stock, urged Intelsat’s Board of Directors to negotiate the agreement or file for bankruptcy to protect the spectrum.
“Failing that [negotiation], we believe the Board has no choice but to resort to bankruptcy and litigation in order to protect Intelsat’s valuable license rights from an illegal modification,” the Feb. 18 letter said. Appaloosa on Thursday declined to comment.
Analyst Giles Thorne, the managing director of Equity Research for TMT at Jeffries said that Intelsat filing for bankruptcy has been “on the cards for a while.” He said the FCC’s change toward a public C-band auction was the lead indicator that a bankruptcy would come, but signs can be traced back to the failure of Intelsat-29e, or the launch failure of Intelsat-27 in 2013.
“This is a stage-managed orchestration with $1 billion of debtor-in-possession funding already committed. This will see Intelsat through the C-band process, which will see it (hopefully) secure the $4.8 billion in accelerated relocation payments, and onto a future as a rehabilitated Lazarus walking a few years down the track,” Thorne said. “Intelsat’s asset base is challenged but ultimately systematic to the global satellite sector.”
Last month, Intelsat opted into a 30-day grace period on an interest payment due April 15. When asked about possible bankruptcy filing and the grace period in an interview with Via Satellite last month, CEO Steve Spengler said Intelsat was in a “transition period.”
“Enhanced financial flexibility has become increasingly important to Intelsat, and many others, in light of new challenges facing the global business environment due to COVID-19. It’s also important to us in light of the recent FCC C-band spectrum order, which – if we choose to proceed with clearing the C-band – will require hundreds of millions of dollars of incremental capital expenditures before costs begin to be reimbursed by the FCC. So, we’re in the process of exploring a range of financing options with new and existing stakeholders,” Spengler said at the time.
CEO Steve Spengler said in the Chapter 11 release that this filing is an effort to change the “substantial legacy debt” that burdens Intelsat’s success. “We intend to move forward with the accelerated clearing of C-band spectrum in the United States and to achieve a comprehensive solution that would result in a stronger balance sheet,” he said.