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Ergen Cash-Out Paves Way For LightSquared Ch. 11 Exit

LightSquared Inc. announced a groundbreaking deal Wednesday to obtain $1.52 billion in fresh financing to pay off Dish Network Corp. chairman Charlie Ergen, the bankrupt wireless venture's largest single creditor, and bring its contentious and enormously costly three-year bankruptcy to an end.

During the final stage of a two-week trial on LightSquared's proposed restructuring strategy, Jeffries Finance LLC stepped in with a surprise offer to fund a new second-lien exit facility that will satisfy Ergen's secured debt claim in full, quieting the final remaining opponent to the debtor's emergence from Chapter 11.

Ergen, who was found last year to have stealthily infiltrated LightSquared’s capital structure for Dish's benefit, had resisted the proposed repayment of his personal investment vehicle SP Special Opportunities LLC with new junior debt rather than cash.

With Jeffries now cashing out his claim, LightSquared has a consensual deal in hand to repay creditors and salvage a 44 percent ownership stake for longtime sponsor Harbinger Capital Partners LLC while splitting up its remaining equity interests among Fortress Credit Opportunities Advisors LLC, Centerbridge Partners LP and SIG Holdings Inc., a JPMorgan Chase & Co. affiliate.

"With SPSO rendered unimpaired and conclusively presumed to have accepted the plan, and with all voting classes now supportive of the plan, these Chapter 11 cases are at their end," LightSquared said.

U.S. Bankruptcy Judge Shelley C. Chapman must find that creditors are treated fairly under the plan, which emerged after the failure of seven previous proposed restructurings — one rejected in court and six other tentative deals that failed to materialize. The judge on Thursday continued hearing LightSquared’s cross-examination of restructuring guru Jim Millstein, Ergen’s star witness against the plan.

Last year, Judge Chapman ordered that Ergen's claim could be partially wiped out due to his stealthy acquisition of LightSquared’s debt, which he accomplished before anyone knew he controlled SPSO.

Jockeying for control of the reorganized LightSquared has continued throughout the trial, with Solus Alternative Asset Management LP and then Cerberus Capital Management LP bidding for progressively larger chunks of Ergen’s claim as late as Wednesday.

Millstein, the head of turnaround shop Millstein & Co., has offered a pessimistic valuation of LightSquared’s spectrum assets relative to what executives and other stakeholders think the company is worth. The brainchild of former Harbinger chief Philip Falcone, LightSquared filed for bankruptcy in 2012 after the Federal Communications Commission rejected its proposed nationwide wireless network over concerns about potential interference with global positioning technologies.

Whether the plan treats other investors fairly depends on how much LightSquared’s spectrum assets are worth with its renewed licensing application still sitting before the FCC. With no way to know how, or when, the FCC will rule, the valuation question has been fraught with conflict.

In testimony on Wednesday, Millstein labeled a report by Moelis & Co. LLC that prices LightSquared's spectrum assets at between $2.5 billion and $4.9 billion — and possibly much higher — as a huge stretch based on “simplified assumptions.”

LightSquared’s valuation has been driving discord since the case began in 2012, turning the bankruptcy into one of the longest and most contentious in recent memory. The valuation question speaks directly to creditor recoveries — the stronger the company, the more debt it can support and the less pain for junior creditors and stockholders.

Overvaluing LightSquared could allow it to raise more new debt, which could become problematic in the future — even paving a path back into bankruptcy — if the assets don't prove lucrative enough.

Mired in mediation, LightSquared began inching toward a consensual exit from bankruptcy after the results of a government spectrum auction in November revealed huge market demand for spectrum, a relatively finite asset that seems to only increase in value. In the auction’s wake, stakeholders began jockeying to provide fresh capital and take on equity risk.

Solus Alternative Asset Management LP, a creditor and preferred stockholder, floated a rival reorganization plan to take a controlling equity stake in exchange for providing $742 million in bankruptcy financing. The debtor earlier this week brought two lingering objectors, Centaurus Capital LP and Providence Equity Partners LLC, on board with the plan by offering new preferred ownership stakes.

LightSquared is represented by Matthew S. Barr, Alan J. Stone, Michael L. Hirschfeld and Andrew M. Leblanc of Milbank Tweed Hadley & McCloy LLP. LightSquared’s special committee is represented by James H.M. Sprayregen, Paul M. Basta and Joshua A. Sussberg of Kirkland & Ellis LLP.

Ergen is represented by Rachel C. Strickland, Tariq Mundiya, James C. Dugan and Norman P. Ostrove of Willkie Farr & Gallagher 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.