Lightsquared Inc., the U.S. group attempting to build a wireless network using satellite spectrum, has recently made an overdue payment of $56.25 million to British satellite firm, Inmarsat PLC (ISA.L).
This payment is in relation to its spectrum-cooperation accord with Inmarsat and has paved the way for the granting of an extension on further installments until April 2014. According to Inmarsat’s press release, “As a result of the amendment announced today, LightSquared will no longer be in default in relation to any payments under the Cooperation Agreement. Notices of default issued by Inmarsat to LightSquared in relation to previous non-payment events will no longer have any effect.”
Lightsquared Inc., is backed by Philip Falcone’s Harbinger Capital Partners. His fund has invested over $3 billion in the venture and hasn’t generated much revenue so far. According to REUTERS, “LightSquared's plans were derailed when the U.S. Federal Communications Commission in February proposed to stop it from building a high-speed wireless network after tests had found that the network could interfere with GPS services used by everyone from farmers and drivers to airlines and the military”. This major road block has even made Falcone consider filing for bankruptcy , but this new payment to Inmarsat sure looks like he’s not yet ready to give up.
This new accord with Inmarsat PLC has definitely bought Lightsquared Inc. some much needed breathing space to deal with its U.S. FCC problems. According to Lightsquared’s press release, the FCC ruling is “legally unprecedented, not supported by technical evidence, and inconsistent with other recent commission action”.
During proceedings like these, no one really knows how things will turn out for Lighstquared and the FCC. They may or may not get a ruling in their favour and the process itself might be a very complicated one. In short, Harbinger Capital Partners, with its tremendous exposure to Lightsquared Inc., is in a very difficult situation. The remaining investors in the fund don’t necessarily face the risk of losing all their money should the FCC remain adamant with its previous decision. A REUTERS article wrote, “Falcone said a bankruptcy would not necessarily wipe out the equity holders of LightSquared because the spectrum it owns retains value.” On the flip side, these remaining investors also stand to win many times their money back should the FCC decide in Lightsquared’s favor.
In light of this uncertainty, one good way for investors in Harbinger is to try to hedge their investments by buying long-term put options for the traded shares of Harbinger Group Inc. (HRG). These options will serve as their insurance against Lightsquared’s possible bankruptcy because they enable investors to sell shares at predetermined higher prices, even in the event of a bankruptcy. Another good thing about this approach is the fact that it doesn’t require investors to get out of Harbinger completely. By hedging with put options, investors limit their downside while still being able to reap potential profits if Lightsquared Inc. gets the FCC to rule in their favor.