LightSquared strikes new $3B restructuring deal, but Dish's Ergen looms as a stumbling block

LightSquared, the bankrupt wireless firm that had been controlled by hedge fund Harbinger Capital Partners, tentatively agreed to a new $3.05 billion restructuring plan that would give 74 percent ownership to JPMorgan Chase, Fortress Investment Group and Cerberus Capital Management.

Under the deal, which will work only if LightSquared exits bankruptcy by Sept. 30, Philip Falcone's Harbinger would keep 12.5 percent of the company, Joshua Sussberg, a lawyer for a special LightSquared committee, told U.S. Bankruptcy Judge Shelley Chapman Tuesday, according to Bloomberg.

According to the Wall Street Journal, the new investors would inject $1.75 billion LightSquared, with Cerberus, Fortress and JP Morgan contributing most of that, and the company would raise another $1.3 billion through the debt markets.

The agreement was reached in mediation with Chapman's colleague, Judge Robert Drain, following a dispute with Dish Network (NASDAQ: DISH) Chairman Charlie Ergen over how his $1 billion in debt would be treated in any reorganization of LightSquared. In a filing last week, Drain said Ergen didn't participate "in good faith" in the mediation, and that he "wasted the parties and the mediator's time and resources." A Dish spokesman hasn't responded to Drain's report, according to the Journal.

Ergen is likely going to continue to be a stumbling block for LightSquared as it seeks to get out of bankruptcy protection. Under the current LightSquared reorganization plan, Ergen, LightSquared's top secured lender, would be paid $470 million in cash for his holdings and would also get a $492 million unsecured note.

However, as the Journal notes, the amount Ergen could actually get back on the note is subject to a trial, which will determine how much his claims should be placed below other creditors' claims in the case.

In May, Chapman threw out LightSquared's earlier restructuring proposal. Chapman ruled that LightSquared's plan would have illegally treated Ergen worse than other holders of the company's bank debt. The judge essentially said it would be too risky to conclude that LightSquared is worth enough money to pay Ergen back over the course of seven years, as it had proposed to do.

However, in a blow to Ergen, Chapman also ruled that some of the $1 billion in LightSquared debt claims held by Ergen would be subordinated below those of other creditors. The judge found that Ergen had used a front company to buy LightSquared's debt on behalf of Dish and not himself, as he had claimed, which violated a credit agreement that bars competitors like Dish from owning company debt. Ergen purchased the debt as Dish was bidding on LightSquared's spectrum, an offer Dish subsequently dropped.

Meanwhile, according to the New York Post, Ergen hasn't given his approval to the new plan, and there was no indication on Tuesday that he would. Ergen's lawyer, Rachel Strickland, told Chapman she wants a trial to review whether it is fair, as well as a full trial to review whether Ergen's debt claims should be subordinated.

LightSquared entered bankruptcy protection in May 2012 after the FCC revoked its conditional license to operate because of unresolved concerns that LightSquared's planned LTE-based network in the L-band would interfere with GPS receivers.

For more:
- see this WSJ article (sub. req.)
- see this Reuters article
- see this Bloomberg article
- see this NY Post article

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