TerreStar, Creditors Settle On Bankruptcy Plan

TerreStar Networks and its creditors have come to an agreement on the plan to get the company out of bankruptcy, though some obstacles remain.

At a hearing today in New York State Bankruptcy Court, the parties agreed that EchoStar would guarantee to buy $125 million of preferred stock, backstopping the reorganization plan. At the same time other creditors are given until Feb. 7 to decide whether or not to participate and buy a part of that as well. In addition TerreStar promised to file the corporate governance plan by Feb. 2. The confirmation hearing, at which the court will decide whether to put the reorganization in place, will happen on March 7.

The agreement comes after marathon sessions of negotiations between several investment firms, TerreStar, and Sprint Nextel. Attorneys for the creditors and TerreStar both said the agreement addresses concerns that too little time was being allowed to find a buyer for the company, and that the planned rights offering wouldn't raise enough money to get the company out of chapter 11.

Getting the two sides to agree on the backstop plan was a major step. Without one it is far more difficult to get a bankruptcy plan approved because there is no certainty of recovering any money at all for creditors.

The only remaining objections are from Sprint. Sprint has two claims against TerreStar; one is for the money owed -- about $100 million -- to Sprint for clearing out the spectrum TerreStar is licensed to use.

Another claim is that one of the subsidiaries of TerreStar that is in bankruptcy, called 0887729 B.C. Limited, shouldn't be part of the same bankruptcy as TerreStar. The 088 entity holds some satellite ground station equipment Sprint says is worth $79.5 million. Sprint says that because of a reimbursement agreement with TerreStar, it is the only creditor of 088 and so should be in a separate proceeding.

Both objections are scheduled to go forward while TerreStar seeks bidders.

Under the plan of reorganization TerreStar's debt will be converted to equity, and 97% of it would go to the current debt holders.

Most of that value would go to EchoStar, which owns a majority of TerreStar's $943.9 million of secured debt in the form of 15% bonds due in 2014. Other debts are $178.7 million of 6.5% senior exchangeable notes and an $85.9 million purchase money credit agreement.

TerreStar will conduct a rights offering -- a sale of preferred stock -- to raise cash to emerge from bankruptcy. Originally only EchoStar was committed to backstop the offering, which meant it would buy in for $100 million, with an option to buy an additional $25 million. EchoStar would also get $3 million as a commitment fee.

Raising the offer to $125 million got the other creditors, who were concerned that it might not be enough to keep the company afloat, to back the current plan. Other holders of the 15% bonds can also decide if they also want to buy the preferred stock as well, and if they do they commit to buying a pro-rated share.

As the creditors - especially those who make up the ad-hoc committee of unsecured creditors - are not being asked to sign a plan support agreement immediately, they also felt that enough time was being allowed to seek a buyer.