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Top Lenders Abandon Ch. 11 Plan To Split Up LightSquared

LightSquared Inc.’s secured bank lenders have jettisoned a Chapter 11 exit plan that would split the wireless venture in two and reorganize each estate separately, the group's attorney said on Monday, opting to pursue only a separate plan keeping the debtor unified.

The long and twisting bankruptcy is slated to come to a head next month when a group of secured lenders will try to convince U.S. Bankruptcy Judge Shelley Chapman to adopt their plan over one offered by controlling equity holder Harbinger Capital Partners LLC, the hedge fund run by Philip Falcone that is largely responsible for LightSquared’s creation.

The Harbinger plan proposes to reorganize LightSquared’s so-called Inc. estate separately from the LightSquared LP unit, which holds $2.3 billion in debt from the secured lenders along with most of the company’s valuable wireless spectrum assets.

At a hearing in Manhattan bankruptcy court, Thomas Lauria of White & Case LLP said that the lenders had concluded that pursuing an LP-only reorganization plan was too risky given the lack of available financing for LP to operate as a standalone company out of Chapter 11 and the regulatory complications involved.

“We have concluded that there is just no financing for an LP only business at this time,” Lauria said. “There's no money to be had to keep LP going by itself.”

The secured lenders’ plan contemplates rolling existing debtor-in-possession financing into an exit facility and tapping additional funding from outside LightSquared’s capital structure. The LP group, which has long maintained that keeping LightSquared together would deliver the most value to all stakeholders, also wants to pay off Mast Capital Management LLC’s claim against the Inc. estate in full and in cash to remove it from the equation.

An amended plan for the combined estates would be submitted to the court by Friday, Lauria said. LightSquared and its special committee share the lenders’ view on keeping the estates together but have not yet taken a position on which plan they prefer and have expressed doubts that a combined-estate transaction is possible.

On the other side of the table are Harbinger and JPMorgan Chase, which along with Mast are the largest stakeholders in the Inc. entities. Harbinger and JPMorgan said last month that they had teamed up to supply $460 million in new loans in support of their Inc.-only plan.

The secured lenders’ plan is also opposed by holders of the LP estate’s preferred equity, including Providence Equity Partners LLC and Centaurus Capital LP. Preferred equity holders would see their ownership stake wiped out and claim that the LP plan rests on a lowballed assessment of LightSquare’s value.

The wireless venture sank into bankruptcy in 2012 after the Federal Communications Commission refused to grant approval for the launch of its wireless network over the possible interference with global positioning technologies.

Harbinger’s attorney David Friedman of Kasowitz Benson Torres & Friedman LLP spent much of the hearing lambasting the LP lenders’ plan, saying it brazenly swings value away from Inc. stakeholders.

“It's not that there could never be a joint plan that Harbinger could agree with, but it's not this,” Friedman said.

The Inc.-only plan depends on Harbinger convincing Judge Chapman to wipe out the LP lenders’ guaranty claims against the Inc. estate. Judge Chapman will begin that proceeding on Oct. 20.

The LP lenders will contend that the guaranty claim can’t be expunged or estimated at zero under the Bankruptcy Code, Friedman said. Judge Chapman tentatively set an Nov. 10 date to commence a confirmation trial on the LP lenders’ plan and — if the guaranty issue goes Harbinger’s way — the Inc.-only plan as well.

In the meantime, Judge Chapman ordered all sides to continue mediation before U.S. Bankruptcy Judge Robert Drain in White Plains, New York, and criticized the parties for not reaching a global resolution after two and a half years in Chapter 11.

“There is a lot of room to maneuver in this case and it's been very disappointing to see people not take advantage,” Judge Chapman said from the bench. “Between now and the 20th, you have a lot of talking to do, because it seems to me that's going to be a pretty significant moment.”

LightSquared appeared on track to emerge from Chapter 11 in June when it unveiled a tentative deal with Dish Network Corp. Chairman Charlie Ergen, its largest pre-petition secured creditor, who had been the most vocal opponent throughout the bankruptcy.

But LightSquared never filed a plan around that agreement, leaving unanswered the question of how to treat Ergen’s $1 billion claim. Judge Chapman has already ruled that some of the claim was subject to equitable subordination due to Ergen’s stealthy acquisition of the debt.

LightSquared contends that Ergen hid his ownership of his investment vehicle SP Special Opportunities LLC to position Dish to scoop up valuable spectrum assets out of bankruptcy.

LightSquared is represented by Matthew S. Barr, Alan J. Stone, Michael L. Hirschfeld and Andrew M. Leblanc of Milbank Tweed Hadley & McCloy LLP.

The LP lenders are represented by Glenn M. Kurtz and Thomas E. Lauria of White & Case LLP.

Harbinger is represented by David M. Friedman, Adam L. Shiff, Daniel A. Fliman and Matthew B. Stein of Kasowitz Benson Torres & Friedman LLP.

Ergen and SPSO are represented by Rachel Strickland, James C. Dugan and Matthew Freimuth of Willkie Farr & Gallagher LLP.

The LightSquared special committee is represented by James H.M. Sprayregen, Paul M. Basta and Joshua A. Sussberg of Kirkland & Ellis LLP.

Centaurus is represented by Jeffrey S. Sabin and Julia Frost-Davies of Bingham McCutchen LLP. Providence is represented by Emanuel C. Grillo, Michael H. Goldstein and Gregory W. Fox of Goodwin Procter LLP.

Mast is represented by Michael S. Stamer, Philip C. Dublin and Meredith A. Lahaie of Akin Gump Strauss Hauer & Feld LLP.

The case is In re: LightSquared Inc., case number 1:12-bk-12080, in the U.S. Bankruptcy Court for the Southern District of New York.