Programmers that were unable to re-negotiate contract terms with money-losing DirecTV Latin America may have lost leverage last week after the company filed for Chapter 11 bankruptcy protection.

The question now becomes how a U.S. bankruptcy court will hash out the financial and operational problems that left DirecTV Latin America, a subsidiary of Hughes Electronics [GMH], unable to sustain its business. The company has seen its revenues shrink from a severe devaluation of local currencies in Latin America.

The bankruptcy petition did not include any of Miami-based DirecTV Latin America’s operating companies in Latin America and the Caribbean. All of those operations will continue to provide service to DirecTV Latin America’s customers, company officials said.

In a significant move, DirecTV Latin America targeted programmers by filing a motion last week in court to reject certain content-related “executory agreements” that it has determined to be uneconomic and not in the satellite TV operator’s best long-term interest. The contracts are with Disney Channel Latin America, Music Choice and FIFA for exclusive rights to broadcast the 2006 World Cup soccer tournament.

DirecTV Latin America warned in January that it needed concessions from programmers, suppliers and business associates to help it stem losses resulting from excessive fixed costs, a substantial debt burden and economic deterioration throughout Latin America. The voluntary Chapter 11-bankruptcy filing followed a determination by company officials that negotiations with programmers and creditors would not achieve a satisfactory long-term outcome.

The satellite TV business in Latin America has been “broken for some time,” said Derek Baine, senior vice president and analyst with Kagan World Media, of Carmel, Calif. DirecTV Latin America lost $202 million last year as economic weakness spread in the region.

One option is for DirecTV Latin America to be sold to News Corp [NWS] and merged with its Sky Latin America unit once the bankruptcy process is completed, Baine said. Such a combination would provide economies of scale in sales and marketing, subscriber acquisition costs and programming.

“Programming costs are too high,” Baine said. DirecTV Latin America tried but failed to convince TV networks during the past couple of months to take “big hair cuts” on past due payments.

Television networks that are “unwilling” to accept modest licensing-fee payments could be dropped completely, Baine said.

The plummeting value of local currencies in Latin America, compared to the U.S. dollar, is a major source of distress for American companies that operate in the region.

Another possible solution for DirecTV Latin America would be to restructure existing programming contracts to be paid in the same local currency that subscribers use to pay their bills, Baine said. Traditionally, those programming contracts have been in U.S. dollars and DirecTV Latin America was slammed financially when the currencies in countries such as Argentina plunged.

Jimmy Schaeffler, a satellite broadcasting consultant who heads The Carmel Group, of Carmel-by-the-Sea, Calif., said reluctance by programmers to offer financial relief to DirecTV Latin America likely caused Hughes officials to seek more favorable treatment through a U.S. bankruptcy court. The programmers would have had more negotiating leverage if they had been able to work out a voluntary revamping of their contracts.

“A bankruptcy filing by a satellite TV operator is an anomaly and hopefully that will remain the case,” Schaeffler said. Hughes’ DirecTV in the United States has developed into a financial success since its launch in 1994, along with its satellite TV rival EchoStar Communications [DISH].

Mickey Alpert, a satellite broadcasting consultant heading Washington-based Alpert & Associates, said a bankruptcy arrangement would give programmers that had the most attractive content the greatest amount of leverage, compared to programmers with less popular content.

However, programmers in general would not have “more leverage” to secure a better deal in Chapter 11 than other creditors, Alpert said. The bankruptcy filing probably will allow DirecTV Latin America to “escape” from unfavorable long-term arrangements with certain programmers, he added.

Either way, programmers will be negotiating with a new leader at DirecTV Latin America. Kevin McGrath, who had led the company since 1996, resigned as chairman last week and was replaced by Eddy Hartenstein, who built DirecTV into a cash cow for Hughes in the U.S. market.

Larry Chapman, who has been with Hughes since 1980, has assumed the vacant posts of president and COO of the Latin American business. Chapman will report directly to Hartenstein, who remains a Hughes senior executive vice president. Also in the leadership mix is Michael Feder, chief restructuring officer at DirecTV Latin America. Feder arrived in January when a unit of his firm AlixPartners was hired to assist the troubled satellite TV operator. Feder will continue to oversee the restructuring efforts during the bankruptcy process but now reports to Chapman.

The bankruptcy process will enable DirecTV Latin America to achieve its goal of reducing its fixed costs by restructuring or rejecting programming contracts that are not in line with the “current economic realities,” Feder said. The court-led process also will provide the best opportunity to ensure that programmers and suppliers appropriately share exchange rate risks and currency devaluation, he added.

In addition, the bankruptcy process should help the company to simplify certain contractual issues and significantly reduce its long-term debt, Feder said.

Hughes agreed to provide DirecTV Latin America with a $300 million senior secured debtor-in-possession financing to supplement the bankrupt company’s existing cash flow and to help ensure that vendors, programmers and other business associates receive payment for services incurred after the bankruptcy filing. -Paul Dykewicz