Exclusive: Falcone mulls voluntary bankruptcy for LightSquared

NEW YORK Wed Apr 4, 2012 7:00pm EDT

Hedge fund manager Philip Falcone testifies before a US House Oversight and Government Reform Committee hearing on the regulation of hedge funds, on Capitol Hill in Washington, November 13, 2008. REUTERS/Jonathan Ernst

Hedge fund manager Philip Falcone testifies before a US House Oversight and Government Reform Committee hearing on the regulation of hedge funds, on Capitol Hill in Washington, November 13, 2008.

Credit: Reuters/Jonathan Ernst

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NEW YORK (Reuters) - Hedge fund manager Philip Falcone said in an interview on Wednesday he is "seriously considering" filing a voluntary bankruptcy for LightSquared, the struggling telecom startup in which his Harbinger Capital Partners is the majority owner.

Falcone said a bankruptcy is one of several options he is considering as he tries to find a way to salvage the company, which reported a $427 million net loss during the first nine months of 2011, and keep its creditors at bay.

He said a bankruptcy would allow the company time to find a way to deal with communications interference issues that have arisen with the planned buildout of a nationwide wireless broadband network.

Falcone said a bankruptcy would not necessarily wipe out the equity holders of LightSquared because the spectrum it owns retains value.

The fate of LightSquared has become an important concern for investors in Falcone's $4 billion hedge fund, which has sunk roughly 60 percent of its money into the telecom. The success or failure of LightSquared will go a long way in determining Falcone's legacy as a money manager.

It wasn't too long ago that Falcone was the toast of hedge fund row after his fund soared to $26 billion in assets after making a wildly successful bet on the collapse of the housing market. Almost overnight, Falcone went from being a relatively unknown distressed debt trader to a billionaire who was buying one of the most expensive townhouses in Manhattan.

The hedge fund manager made his comments during an interview in his Park Avenue office. He spoke as LightSquared's creditors, which include hedge funds led by Carl Icahn and David Tepper, are weighing whether to declare the company to be in default on a $1.6 billion loan, two people familiar with the situation said.

Falcone's big bet on wireless has always been a risky one given that the telecom space is one with a history of failure and usually requires significant sums of cash to become operational. But Falcone began raising money for LightSquared at a time the capital markets remained less than hospitable to risky ventures and the network has been plagued by concerns it could interfere with GPS for planes and the military.

Some of the hedge fund creditors have told Falcone he has until the end of the month to strike a deal or they might move to force the company into bankruptcy, the sources said.

Falcone's announcement that he is considering a voluntary bankruptcy is a reversal of a stance he took in February after the Federal Communications Commission withdrew a conditional waiver that allowed LightSquared to begin building out its mobile network.

The FCC revoked the waiver after tests revealed that LightSquared's planned network would interfere with crucial satellite systems used for critical services such as aviation safety and the U.S. Department of Defense. The FCC action also came after bitter protests from a trade group representing companies that rely on Global Positioning Systems, which operate in a spectrum close to LightSquared.

In the wake of the FCC decision, LightSquared's main business partner, Sprint, canceled a deal to help it build out the network.

LightSquared's debt has sunk in value since the FCC decision and now trades for about 50 cents on the dollar.

The telecom's troubles are causing real pain for Falcone's hedge fund investors. In February, Harbinger's flagship fund lost 29.6 percent because of a writedown in the value of the LightSquared investment. Last year, the fund lost 47 percent of its value because of an early LightSquared writedown.

But Falcone said he is telling his hedge fund investors that all is not lost. He is confident the value of LightSquared's operating spectrum will rise again once it is able to come up with a plan for resolving the interference issues.

(Additional reporting by Sinead Carew and Svea Herbst-Bayliss; Editing by Jennifer Ablan and Phil Berlowitz)

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