Crash and burn?
Weeks after the $5 billion Iridium LLC global satellite
telecommunication system filed for Chapter 11 federal bankruptcy
protection, Iridium ads are still running with, ?Our global
satellite system is invaluable. Even before it helps you avoid a
million-dollar mistake.'
Iridium looks like becoming that mistake.
Despite assurances from Iridium management that the company will ?emerge from bankruptcy stronger and more vibrant? after it has had an opportunity to restructure its finances, bankers are pessimistic about the viability of any global project in the sector ? too little of Iridium technology has hit the market too late.
In late August, just weeks after Iridium declared bankruptcy, ICO Global Communications Holdings, the second of the four largest satellite telecom projects under development, also announced bankruptcy.
The bankruptcies have mixed implications for the remaining projects ? Globalstar Telecommunications and Teledesic. Given many analysts claim total subscribers to a global telecoms system are unlikely to exceed 1.5 million by 2005 ? not enough to support payments on the billions of dollars all four projects have raised ? the two remaining projects have a better chance of success.
Conversely, both projects also face increased market scrutiny and a bigger hurdle to their attempts to raise capital.
Iridium became the world's first global satellite phone and paging network through a constellation of 66 low-earth orbiting satellite when commercial service began on November 1, 1998. Eight rocky months later on August 13, Iridium was forced into bankruptcy when it failed to reach an agreement with creditors and defaulted on a $800 million senior secured credit facility triggering the default of a $750 million guaranteed credit facility.
Two days earlier, bondholders who own $1.45 billion of Iridium's debt filed for ?involuntary? bankruptcy. The company's stock prices had dropped 90 % before trading was halted in August and with only 20,000 subscribers Iridium was woefully short of its one million-subscriber target by the end of 1999.
The project's dilemma is a far cry from its auspicious beginnings in 1994, when its primary backer, Motorola created the company after raising $1.6 billion in the largest private placement in history. When asked what is at the core of Iridium's troubles, one Wall Street analyst comments, ?Make a list of everything you can think of ? technological glitches, marketing and distribution mishaps, management turnover, etc ? and then just get to the bottom and check all of the above.?
Although officially few Iridium participants are talking, (especially principal lenders, Chase and Barclays), off the record and through appointed spokespeople numerous mistakes have been conceded by those working close to the deal.
?It's to anyone, almost anytime, anywhere, referring to geographic regions, not somebody's bunker or in buildings,? comments Scott Wyman, a spokesperson at Motorola in Arizona, defending Iridium's technology and its original advertising claim, ?Anyone, Anywhere, Anytime ? Iridium.?
?You cannot be standing next to a mountain and hope to either receive or successfully place a call,? adds Wyman, contradicting another piece of marketing promoted by Iridium which boasted phone calls could be made whether you were on top of a mountain or in the middle of the ocean.
To use the phone it is necessary to have a direct line of sight to a satellite passing overhead and Iridium cannot be used inside a building or in a car without special antennae accessories.
Kyocera, which manufactured these critical components, was criticized for not providing the equipment until April, six months after service began.
?It took several months to have that stuff ready to distribute in volume to service providers. If everything had been ready from day one of service it would have gone a lot better,? says a source close to the project.
Even if Iridium's phones had operated smoothly with all their components, observers note numerous other problems plagued the system, including the high cost of Iridium phones, (originally $3000 for the handset). Often described as looking like a brick, the phones' weight of nearly a half kilogram was also unappealing to consumers who would have to lug it around to the remote places it would be of most use.
At $9 a minute the high cost of service also gave Iridium a bad reputation when compared to other mobile phones such as significantly cheaper cellular phones with drastically cheaper service and ever expanding coverage areas. With subscriptions lagging, in July, Iridium cut the cost of its phone in half and simplified their pricing scheme enabling service providers or gateways to offer rates at around $3 a minute globally.
The hyper expansion of cellular telecommunications across the planet, forced Iridium to shift the thrust of its marketing strategy away from the global business executives to vertical markets such as shipping, oil exploration, forestry and mining, government, aeronautical, science, and international media.
Marcus Jones, a telecommunications analyst at Moody's Investors Service in New York warns the lesson to be learned by Iridium that creditors and investors should more carefully analyze market studies and marketing strategies.
?Maybe there are so many billions of people without access to telephone service and you could do another cut on how many of those people could afford satellite phones, and then define your target market. But you still have to get to that market and give them a product that they are willing to buy,? comments Jones.
?Just because there's this great opportunity, you're still going to have to articulate a better strategy about how you're going to get it, not just that you're going to put up this technological marvel that's going to work anywhere on the globe, it's the marketing part of it that I think people will be focusing on and I think that's where attentions turning in Globalstar's case,? adds Jones.
David Gordon, a lawyer at Latham & Watkins in New York agrees. ?Iridium is going to heighten the critical eye that lenders take to various market studies. The market studies are the things that by and large drive the financial viability of any of these deals although they are just a prediction of how these things will do,? says Gordon, who worked on many of the Global Crossing undersea cable transactions.
A director of global project finance at a major New York bank explains that despite the market studies, his bank turned down financing for Iridium because it didn't think network subscribership and usage would be big enough to cover the cost.
?If you're out in the ocean somewhere cell phones won't help you. So I guess one of the companies, whether it's Globalstar, Iridium, or ICO, will come up a winner with a global phone. But you would have to think that the mass market is not in ship's captains ? it's really in businessman that fly back and forth between Europe and the US, Asia and the US,? commented the banker who predicted that within the next several years a single cellular phone will function in the US and GSM networks alike and effectively provide global coverage for the largest segment of the market.
The banker commented on the risks assumed by Chase, which led the financing.
?Chase was either blinded by the high yield fees and were going to stick it to Goldman ? who dropped out of the high yield financing.
Or they saw that Motorola had so much money in it that it was bound to succeed. Or they just decided that since they couldn't do due diligence they would just pray that the consultant was right this time,? he said.
A vice-president in the telecom group of another bank, who highlighted some of the challenges for Iridium and the satellite telecom sector, echoed the bank director's.
?Iridium essentially has to go back and re-write the business plan and re-access the capital markets in order to replenish the galaxy of satellites which burn up in the atmosphere after five years or so,? the banker said.
?There's significant pressure on the company because if they can't replenish the space segment, they're out of business.?
According to restructuring agents and industry sources, one of Iridium's bail-out proposals calls for a conversion of the company's debt into equity and another $500 million from investors while it strives to sign new subscribers. For bondholders, an equity conversion amounts to around 30 % of the firm, while Motorola, which has a $2.2 billion exposure to Iridium through various assets and obligations would receive an additional 10 %, but concede to a moratorium of the payments it receives from the company for network oversight. Iridium hired Alvarez & Marsal of New York as restructuring advisers on September 1, while the company struggles through bankruptcy negotiations. DLJ was also hired by Iridium as a restructuring agent. The company dismissed rumours that it was considering selling part or all of its system to the US government.
Two principals from Alvarez & Marsal, Joseph Bondi and David Gibson, have assumed interim top management positions, left open after a series of departures by senior officers at the height of Iridium's financial distress.
Bankers comfortable with the original management team are less confident as a result of the turnovers, according to sources. At the end of February, Iridium's CFO, Roy Grant resigned and was replaced by Leo Mondale in May.
Two months after Grant's departure, Iridium's CEO and vice-chairman, Edward Staiano stepped down and was replaced by John Richardson. As part of the restructuring, sources say there will be layoffs but would not indicate how many or when those layoffs would occur.
While special purpose companies created to manage the other major satellite projects deny Iridium's financial distress have them cornered in any way, industry observers disagree. ?It's put a dark cloud over the sector and that's somewhat evidenced by even low earth orbit and medium earth orbit systems having more difficulty in raising capital,? comments one market player, who anticipates projects will be forced to seek even greater equity contributions from sponsors.
?The financial community, particularly those that have true Iridium commercial risk exposure, are going to think long and hard before they extend credit to someone in the satellite business,? comments a banker close to the Iridium deal.
?Globalstar may be very credible, very credit worthy, but just because of the fact that a lot of the banks have Iridium exposure in their portfolio, and it's in full work out, they're going to be in a recovery mode, rather than an extension and new capital mode for the foreseeable future,? the banker adds.
Against those odds, Globalstar recently managed to rework a $500 million bank facility needed to launch the rest of its 48 satellites and begin commercial service: Bank of America led the deal and acted as administrative agent with Credit Lyonnais as syndication agent and Lehman Brothers handling documentation.
Although Teledesic has key differences with Iridium, as a trailblazer of new telecom technology many industry observers note that the $10 billion project may encounter problems similar to Iridium's in a largely untested satellite broadband market.
According to Roger Nyuss, a spokesperson at Teledesic in Redmond, Washington: ?Clearly we're watching Iridium and ICO and we're learning from their experience. We certainly don't intend to make the same mistakes.
Iridium's problems stem from marketing and distribution so we'll certainly learn from that and I think overall we're targeting a different market with a different service and we believe the broadband market is the single largest market in the coming decade, so that's what we're focused on.?
Motorola, Boeing, Bill Gates, and cell phone pioneer, Craig McCaw, also back Teledesic, which has secured around $3 billion to date.
Teledesic combines broadband data and value added services over a global network that is optimized for the Internet protocol, as opposed to Iridium, ICO, and Globalstar's mobile voice services over narrow bandwidth.
Nevertheless, market sources say they're cautious of Teledesic which represents the next generation of mobile satellite systems.
They add that the fate of future telecom deals will be tied to the ability of Iridium to be resuscitated.
Motorola's Wyman may reflect Iridium's prospects, ?Motorola has a long history of investing in and launching new technologies and this is certainly one of them, Nextel is another, paging, and cellular, and going all the way back to car radios, so I'm not sure what lessons we've learned from Iridium. Some of the technologies we've invested in have been highly successful and some have not, either immediately or long term and that's not going to change the way we will continue to conduct business.?
Iridium looks like becoming that mistake.
Despite assurances from Iridium management that the company will ?emerge from bankruptcy stronger and more vibrant? after it has had an opportunity to restructure its finances, bankers are pessimistic about the viability of any global project in the sector ? too little of Iridium technology has hit the market too late.
In late August, just weeks after Iridium declared bankruptcy, ICO Global Communications Holdings, the second of the four largest satellite telecom projects under development, also announced bankruptcy.
The bankruptcies have mixed implications for the remaining projects ? Globalstar Telecommunications and Teledesic. Given many analysts claim total subscribers to a global telecoms system are unlikely to exceed 1.5 million by 2005 ? not enough to support payments on the billions of dollars all four projects have raised ? the two remaining projects have a better chance of success.
Conversely, both projects also face increased market scrutiny and a bigger hurdle to their attempts to raise capital.
Iridium became the world's first global satellite phone and paging network through a constellation of 66 low-earth orbiting satellite when commercial service began on November 1, 1998. Eight rocky months later on August 13, Iridium was forced into bankruptcy when it failed to reach an agreement with creditors and defaulted on a $800 million senior secured credit facility triggering the default of a $750 million guaranteed credit facility.
Two days earlier, bondholders who own $1.45 billion of Iridium's debt filed for ?involuntary? bankruptcy. The company's stock prices had dropped 90 % before trading was halted in August and with only 20,000 subscribers Iridium was woefully short of its one million-subscriber target by the end of 1999.
The project's dilemma is a far cry from its auspicious beginnings in 1994, when its primary backer, Motorola created the company after raising $1.6 billion in the largest private placement in history. When asked what is at the core of Iridium's troubles, one Wall Street analyst comments, ?Make a list of everything you can think of ? technological glitches, marketing and distribution mishaps, management turnover, etc ? and then just get to the bottom and check all of the above.?
Although officially few Iridium participants are talking, (especially principal lenders, Chase and Barclays), off the record and through appointed spokespeople numerous mistakes have been conceded by those working close to the deal.
?It's to anyone, almost anytime, anywhere, referring to geographic regions, not somebody's bunker or in buildings,? comments Scott Wyman, a spokesperson at Motorola in Arizona, defending Iridium's technology and its original advertising claim, ?Anyone, Anywhere, Anytime ? Iridium.?
?You cannot be standing next to a mountain and hope to either receive or successfully place a call,? adds Wyman, contradicting another piece of marketing promoted by Iridium which boasted phone calls could be made whether you were on top of a mountain or in the middle of the ocean.
To use the phone it is necessary to have a direct line of sight to a satellite passing overhead and Iridium cannot be used inside a building or in a car without special antennae accessories.
Kyocera, which manufactured these critical components, was criticized for not providing the equipment until April, six months after service began.
?It took several months to have that stuff ready to distribute in volume to service providers. If everything had been ready from day one of service it would have gone a lot better,? says a source close to the project.
Even if Iridium's phones had operated smoothly with all their components, observers note numerous other problems plagued the system, including the high cost of Iridium phones, (originally $3000 for the handset). Often described as looking like a brick, the phones' weight of nearly a half kilogram was also unappealing to consumers who would have to lug it around to the remote places it would be of most use.
At $9 a minute the high cost of service also gave Iridium a bad reputation when compared to other mobile phones such as significantly cheaper cellular phones with drastically cheaper service and ever expanding coverage areas. With subscriptions lagging, in July, Iridium cut the cost of its phone in half and simplified their pricing scheme enabling service providers or gateways to offer rates at around $3 a minute globally.
The hyper expansion of cellular telecommunications across the planet, forced Iridium to shift the thrust of its marketing strategy away from the global business executives to vertical markets such as shipping, oil exploration, forestry and mining, government, aeronautical, science, and international media.
Marcus Jones, a telecommunications analyst at Moody's Investors Service in New York warns the lesson to be learned by Iridium that creditors and investors should more carefully analyze market studies and marketing strategies.
?Maybe there are so many billions of people without access to telephone service and you could do another cut on how many of those people could afford satellite phones, and then define your target market. But you still have to get to that market and give them a product that they are willing to buy,? comments Jones.
?Just because there's this great opportunity, you're still going to have to articulate a better strategy about how you're going to get it, not just that you're going to put up this technological marvel that's going to work anywhere on the globe, it's the marketing part of it that I think people will be focusing on and I think that's where attentions turning in Globalstar's case,? adds Jones.
David Gordon, a lawyer at Latham & Watkins in New York agrees. ?Iridium is going to heighten the critical eye that lenders take to various market studies. The market studies are the things that by and large drive the financial viability of any of these deals although they are just a prediction of how these things will do,? says Gordon, who worked on many of the Global Crossing undersea cable transactions.
A director of global project finance at a major New York bank explains that despite the market studies, his bank turned down financing for Iridium because it didn't think network subscribership and usage would be big enough to cover the cost.
?If you're out in the ocean somewhere cell phones won't help you. So I guess one of the companies, whether it's Globalstar, Iridium, or ICO, will come up a winner with a global phone. But you would have to think that the mass market is not in ship's captains ? it's really in businessman that fly back and forth between Europe and the US, Asia and the US,? commented the banker who predicted that within the next several years a single cellular phone will function in the US and GSM networks alike and effectively provide global coverage for the largest segment of the market.
The banker commented on the risks assumed by Chase, which led the financing.
?Chase was either blinded by the high yield fees and were going to stick it to Goldman ? who dropped out of the high yield financing.
Or they saw that Motorola had so much money in it that it was bound to succeed. Or they just decided that since they couldn't do due diligence they would just pray that the consultant was right this time,? he said.
A vice-president in the telecom group of another bank, who highlighted some of the challenges for Iridium and the satellite telecom sector, echoed the bank director's.
?Iridium essentially has to go back and re-write the business plan and re-access the capital markets in order to replenish the galaxy of satellites which burn up in the atmosphere after five years or so,? the banker said.
?There's significant pressure on the company because if they can't replenish the space segment, they're out of business.?
According to restructuring agents and industry sources, one of Iridium's bail-out proposals calls for a conversion of the company's debt into equity and another $500 million from investors while it strives to sign new subscribers. For bondholders, an equity conversion amounts to around 30 % of the firm, while Motorola, which has a $2.2 billion exposure to Iridium through various assets and obligations would receive an additional 10 %, but concede to a moratorium of the payments it receives from the company for network oversight. Iridium hired Alvarez & Marsal of New York as restructuring advisers on September 1, while the company struggles through bankruptcy negotiations. DLJ was also hired by Iridium as a restructuring agent. The company dismissed rumours that it was considering selling part or all of its system to the US government.
Two principals from Alvarez & Marsal, Joseph Bondi and David Gibson, have assumed interim top management positions, left open after a series of departures by senior officers at the height of Iridium's financial distress.
Bankers comfortable with the original management team are less confident as a result of the turnovers, according to sources. At the end of February, Iridium's CFO, Roy Grant resigned and was replaced by Leo Mondale in May.
Two months after Grant's departure, Iridium's CEO and vice-chairman, Edward Staiano stepped down and was replaced by John Richardson. As part of the restructuring, sources say there will be layoffs but would not indicate how many or when those layoffs would occur.
While special purpose companies created to manage the other major satellite projects deny Iridium's financial distress have them cornered in any way, industry observers disagree. ?It's put a dark cloud over the sector and that's somewhat evidenced by even low earth orbit and medium earth orbit systems having more difficulty in raising capital,? comments one market player, who anticipates projects will be forced to seek even greater equity contributions from sponsors.
?The financial community, particularly those that have true Iridium commercial risk exposure, are going to think long and hard before they extend credit to someone in the satellite business,? comments a banker close to the Iridium deal.
?Globalstar may be very credible, very credit worthy, but just because of the fact that a lot of the banks have Iridium exposure in their portfolio, and it's in full work out, they're going to be in a recovery mode, rather than an extension and new capital mode for the foreseeable future,? the banker adds.
Against those odds, Globalstar recently managed to rework a $500 million bank facility needed to launch the rest of its 48 satellites and begin commercial service: Bank of America led the deal and acted as administrative agent with Credit Lyonnais as syndication agent and Lehman Brothers handling documentation.
Although Teledesic has key differences with Iridium, as a trailblazer of new telecom technology many industry observers note that the $10 billion project may encounter problems similar to Iridium's in a largely untested satellite broadband market.
According to Roger Nyuss, a spokesperson at Teledesic in Redmond, Washington: ?Clearly we're watching Iridium and ICO and we're learning from their experience. We certainly don't intend to make the same mistakes.
Iridium's problems stem from marketing and distribution so we'll certainly learn from that and I think overall we're targeting a different market with a different service and we believe the broadband market is the single largest market in the coming decade, so that's what we're focused on.?
Motorola, Boeing, Bill Gates, and cell phone pioneer, Craig McCaw, also back Teledesic, which has secured around $3 billion to date.
Teledesic combines broadband data and value added services over a global network that is optimized for the Internet protocol, as opposed to Iridium, ICO, and Globalstar's mobile voice services over narrow bandwidth.
Nevertheless, market sources say they're cautious of Teledesic which represents the next generation of mobile satellite systems.
They add that the fate of future telecom deals will be tied to the ability of Iridium to be resuscitated.
Motorola's Wyman may reflect Iridium's prospects, ?Motorola has a long history of investing in and launching new technologies and this is certainly one of them, Nextel is another, paging, and cellular, and going all the way back to car radios, so I'm not sure what lessons we've learned from Iridium. Some of the technologies we've invested in have been highly successful and some have not, either immediately or long term and that's not going to change the way we will continue to conduct business.?
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