August 12, 2010 / 7:52 PM / in 8 years

INSIGHT-TerreStar's failings bedevil Harbinger's Falcone

* TerreStar bankruptcy looks likely

* Harbinger would provide DIP financing

* Bankruptcy would impact Harbinger funds

* Failure raises questions about Falcone’s telecom plan

By Matthew Goldstein

NEW YORK, Aug 12 (Reuters) - Billionaire money manager Phil Falcone’s big bet on a high-speed wireless network, which has led him to mortgage many of his flagship fund’s key assets, could soon look even dicier as one of its cornerstone telecom investments teeters on the brink of bankruptcy.

Upstart telecom firm TerreStar Corp TSTR.O, which Falcone’s Harbinger Capital Partners fund had invested in and which had been slated to provide some of the infrastructure for his ambitious satellite-based wireless network, recently warned that it lacks sufficient cash and financing to pay for all of its third-quarter expenses.

That means it may have to file for a Chapter 11 bankruptcy, the Reston, Virginia-based firm said in an Aug. 6 regulatory filing.

A TerreStar bankruptcy filing could come soon if TerreStar can’t reach a restructuring agreement with its bondholders, which includes funds managed by Falcone’s Harbinger Capital Partners, said three people familiar with the company’s situation.

Falcone and New York-based Harbinger is prepared to step in and provide some of the debtor-in-possession financing TerreStar will need in the event of a Chapter 11 filing, these same sources said.

Douglas Brandon, TerreStar’s general counsel, declined to discuss the possibility of a filing, responding in an email that “we do not comment on rumors.” Harbinger spokesman Eliot Hoff said, “We don’t comment on other companies.”

The Harbinger spokesman added that “Phil Falcone is a strategic visionary with a record of success through all business cycles.”

For a time, Harbinger clearly was a big part of Falcone’s telecom vision.

Falcone’s hedge fund is TerreStar’s biggest equity holder, owning 30 percent of its voting shares. Falcone’s hedge funds also hold at least $150 million of the company’s nearly $1 billion in debt, according to regulatory filings.

Earlier this year, a Harbinger-controlled telecom entity called LightSquared entered into a series of leasing deals with TerreStar that totaled nearly $70 million in fees for the cash-starved company. One of the deals gave LightSquared, formerly called SkyTerra, access to minutes for voice and data transmission on TerreStar’s lone telecommunications satellite.

LightSquared is now the crown jewel in Falcone’s ambitious plan to build a wireless network that will rely on two orbiting satellites and earth-based transmission platforms to bring broadband Internet and phone access to much of the United States, including poorly served rural areas.

Harbinger, with more than $6 billion in assets spread across a half-dozen funds, has sunk more than $2.9 billion into the development of LightSquared. But industry experts say the wireless company needs to raise at least $2 billion more to complete the build-out of its network, which includes the launch of two satellites.

LightSquared says it has additional debt and equity financing of up to $1.75 billion but has not disclosed the source of that funding. In July, investment bank UBS (UBS.N) arranged a $400 million financing deal for Harbinger in which the hedge fund had to pledge billions of dollars in assets as collateral, including the fund’s equity interest in the holding company for the upstart wireless network.

In short order, LightSquared has become the single biggest investment for Harbinger and the signature piece of Falcone’s now multi-year bet on wireless broadband technology. TerreStar once was an important component of that strategy, but people familiar with LightSquared said TerreStar is no longer critical to Falcone’s master plan.

To some degree, the stock market long ago factored in the prospect of a TerreStar bankruptcy. The company’s shares most recently traded on Nasdaq for about 40 cents and hasn’t traded above $1 since late April.

STRATEGY QUESTIONS

But a bankruptcy filing by TerreStar would be a blow to Harbinger and potentially lead to a further decline in the value of a $2 billion fund for hard-to-sell assets where much of Harbinger’s investment in TerreStar is located, sources said. The so-called sidepocket already has lost some 14 percent of its value this year.

Meanwhile, Harbinger’s flagship fund, as of mid-July, was down 10 percent this year. In 2007, Falcone rocketed to hedge fund fame when Harbinger registered a more than 100 percent gain after the former Barclays Capital distressed debt trader made a savvy bet on the collapse of the U.S. housing market and bullish wager on mining companies.

It was after his big success in 2007 that Falcone started to set his sights on broadband wireless networks.

However, TerreStar’s financing struggles raise questions about Falcone’s ability to find enough deep-pocketed investors, given that TerreStar’s strategy is not too different from that of LightSquared. A similar satellite and earth-based broadband strategy also is being developed by DBSD North America, which itself filed for bankruptcy last year.

A U.S. bankruptcy judge signed off on DBSD’s restructuring plan in October. But the company, a subsidiary of ICO Global Communications ICOG.O, is still waiting for the Federal Communication Commission to approve its restructuring plan.

“I think this would cause people to ask why Harbinger can make a success of it when neither DBSD and TerreStar have been able to do it,” said Tim Farrar, a telecom industry consultant who was one of the expert witnesses in the DBSD bankruptcy for critics of the restructuring plan.

Hoff, the Harbinger spokesman, responded in an email that LightSquared has a better chance of success because of “its clean balance sheet and ability to obtain additional debt and equity capital, and the quality, vision and experience of its senior management cadre.” The company recently announced a deal with Nokia Siemens Networks to provide equipment and services to support the new network. (Reported by Matthew Goldstein; Editing by Richard Chang)

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