Anyone who has been following the LightSquared case closely knows that the company is just one bad move away from Chapter 11. LightSquared is seeking a one-week extension on a debt-terms violations waiver that expires this morning, so the company can negotiate a longer-term extension that will cover the company for 18 to 24 months. One large hurdle has been Philip Falcone, founder of Harbinger Capital Management, LLC, the company that started LightSquared.
Falcone sees the best way for him to maintain control of LightSquared is to file for Chapter 11 status, a move lenders obviously don’t want LightSquared to make as it removes the creditor’s rights to call a default on LightSquared’s debt. For their part, a few U.S. Senators want to avoid Chapter 11 for LightSquared as well, as LightSquared could bring broadband to rural areas and drive competition in the mobile broadband market.
If Falcone and lenders are able to come to a deal, Falcone would need to agree to step aside from the company he created. Falcone would not be allowed to serve as an officer of the company immediately after a deal is reached, and he would eventually have to step down as a LightSquared director. Falcone insists that he is not, nor never intended to be a board member of LightSquared, stating that the company “needs telecom and industry veterans, not hedge-funds managers.”
The short-term deal would give LightSquared “bankruptcy-remote” status, which would make it extremely difficult for the firm to enter Chapter 11. Further, lenders want Falcone to be held personally liable for the $1.6 billion debt if it can be demonstrated that Falcone supported, encouraged, or caused a bankruptcy filing at a later date. An alternative provision would install a director or directors on LightSquared’s board that could block a bankruptcy vote should one ever arise.
Though he has tentatively agreed to step aside, Falcone has not officially agreed to either of these provisions yet, and a source close to LightSquared says that Falcone might not ever agree to these provisions. If he doesn’t, LightSquared will likely file for Chapter 11 as early as today, though that filing comes with several risks and benefits for LightSquared as well. We should know much more later today.