Fri 12/10/2021 13:42 PM
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Relevant Documents:
Third Amended Plan
Zelin Declaration
Cowan Declaration

Intelsat’s confirmation hearing has focused on arguments between plan supporters and the convertible noteholder ad hoc group, or the convert group, the last creditor group holding out from voting in favor of the debtors’ plan. The HoldCo creditor ad hoc group, or HoldCo group, the Intelsat Jackson crossover group and the Jackson first lien noteholder group all support the third amended plan, and on Nov. 6 the debtors reached an agreement with adversary SES Americom to push resolution of its claims until after confirmation.

The convert group, represented by Stroock as counsel and Lazard as financial advisor, says that the plan’s proposed 12% recovery for holders of $402.5 million in 4.5% convertible notes issued by Intelsat SA, the ultimate parent referred to as SA throughout, is too low. The convert group argues that SA is entitled to recover more value than is proposed under the plan because of SA tax attributes, including new operating loss carryovers, or NOLs, $4.9 billion in FCC accelerated C-band/5G relocation payments, or ARPs, and plan consent rights. The convert group argues that these sources of value are not fully reflected in the plan’s maximum $37.5 million cash distribution to SA (which would be reduced by SA’s share of the debtors’ professional fees and costs in the case, as calculated below).

Based on information presented at the confirmation hearing and in recent court filings as well as estimates made by Reorg, the convert group appears to argue for convertible noteholder recoveries that could range from 44% to 88%, well above the 12% recovery contemplated by the plan.

According to Solve Advisors, the convertible notes traded around the mid-30s until late October when they dropped to the teens. As of Dec. 9, the convertible notes were trading around 15, implying a roughly 95% likelihood of convertible noteholders receiving the 12% recovery contemplated by the plan and a 5% likelihood of the mid scenario of argued recoveries by the convert group, as estimated by Reorg and as presented below.

For the plan recovery buildup in the table below, Reorg uses balance sheet cash figures and professional fee amounts as of Sept. 30 per the debtors’ September monthly operating report as well as information provided on page 22 of the Zelin declaration. For the convert group-argued recovery buildup, Reorg uses presentation materials from the first day of the debtors’ confirmation hearing along with its own estimates as described later in the article.

HoldCo Creditor AHG Waiver

When illustrating recoveries for convertible noteholders, it is important to consider the HoldCo group waiver included in the amended plan filed on Aug. 24.

Through the waiver, the HoldCo group members gave up their right to incremental recoveries on their convertible note holdings. Specifically, the group waived any incremental recoveries above $49 million but would begin to participate in recoveries again above $145 million. As of Dec. 2, the HoldCo group held 32.1% of the convertible notes, while the convert group held 65.5% and other holders held 2.3%.

The waiver shows that while recoveries between the HoldCo and convert groups are essentially the same under the plan, if the additional recoveries argued for by the convert group are realized, the convert group could have recoveries over 20 percentage points higher than the HoldCo group.

Appaloosa, the largest holder in the three-member HoldCo group, holds $104.2 million of convertible notes and has larger dollar and percentage holdings in both LuxCo and ICF notes. The HoldCo group collectively holds 32.1% of the convertible notes, 37.3% of the LuxCo notes and 73.4% of the ICF notes.

By contrast, the convert group holds 8.8% of the LuxCo notes, 1.4% of the ICF notes and 6.2% of the Jackson unsecured notes. Cyrus Capital is the largest holder in the seven-member convert group with $304.8 million of collective holdings, including $120.8 million, or 30%, of the convertible notes.

Main Points of Contention

Pursuant to the plan, value allocated to SA, issuer of the convertible notes, is approximately $39 million based on the $37.5 million cash distribution plus over $1 million of balance sheet cash, but drops to $27 million after accounting for roughly $12 million of professional fees projected to be incurred by the convertible noteholders through the Dec. 31 effective date. This excludes any value convertible noteholders would receive from SA’s minority claim on the Envision box.

In addition to recoveries from SA, convertible noteholders would be entitled to receive 30% of effective date cash at the Envision box, less corresponding restructuring fees, plus roughly 24% of the series B warrants allocation to the Envision box.

During the first day of Intelsat’s confirmation hearing, Dan Fliman of Stroock, as counsel to the convert group, argued that the Intelsat Jackson entities’ ultimate parent, Intelsat Connect Finance, or ICF, was “vastly overcompensated” under the plan in part because the HoldCo group controlled the voting class for ICF based on its holdings, and thus also controlled outcomes for Envision based on the ICF’s majority claim on the Envision box.

A summary of common equity and warrant splits is shown below along with a breakdown of claims. The ICF box has an approximate 76% claim on the Envision box and the Intelsat SA box has an approximate 24% claim on the Envision box.

Fliman said that compared with the $39 million of value allocated to the Intelsat SA box, the ICF box is receiving $247 million of value, comprising balance sheet cash, 4% of the pre-dilution common equity and a majority of the warrants, before accounting for professional fees and any contingent value right, or CVR, proceeds the ICF box may receive. Paul Basta of Paul Weiss, counsel for the HoldCo group, argued that the plan’s proposed convertible noteholder recovery of 12% is similar to the 13% combined recovery for ICF and LuxCo noteholders, based on a 26% recovery for ICF noteholders and a 0% recovery for LuxCo noteholders.

Fliman argued at the hearing that SA is entitled to value from NOLs and the ARPs. He presented the following image at the hearing:

Basta countered that creditors of SA and those of ICF and LuxCo are “not similarly situated” and thus the unequal allocations are justified, as illustrated below in a table he presented at the hearing:

Tax Dispute

As shown above, certain Intelsat entities are members of a Luxembourg tax unit - of which Intelsat Holdings SA (“Holdings”) is the parent - that has $5.2 billion of NOLs. The debtors argued at the hearing that preservation of these NOLs via the Luxembourg tax unity is worth $100 million to $150 million, while the declaration of Tyler Cowan of Lazard, financial advisor to the convert group, argues a value of $170 million to $188.9 million allocable to Holdings. SA, the issuer of the convertible notes, is the grandparent of Holdings.

The debtors noted that Jackson would need to pay each Jackson parent to receive the benefit of the tax unity and further asserted that any value to convertible noteholders would be wiped away by $8 billion of Jackson noteholder guarantee claims at both Intelsat Investment Holdings Sarl and Holdings, assuming a 1% risk-weighted recovery on those claims as illustrated below in materials presented by the debtors’ counsel, Kirkland & Ellis, during the confirmation hearing. The convert group has objected to the guarantee claims, which the debtors attempted to release just prior to filing as allowed under the indentures.

Additionally, there are $7.9 billion of non-tax unity NOLs projected as of Dec. 31 that are being retained by SA’s stakeholders. Pursuant to the plan, convertible noteholders would be entitled to value from these NOLs; however, the debtors do not believe that these non-Unity NOLs can be monetized by SA itself, according to the Zelin declaration. The Zelin report indicates that the convert group valued these non-tax unity NOLs at $261 million to $290 million, which at the low end would give convertible noteholders a recovery of $310 million when adding to the roughly $50 million of recovery under the plan, resulting in a recovery of over 75%, which would be by far the highest recovery of Intelsat’s unsecured creditors.

Fliman’s presentation at the confirmation hearing included a chart indicating that SA’s assets include a Luxembourg tax attribute settlement ranging from $100 million to $206 million. Reorg uses the midpoint of this range when showing illustrative recoveries and assumes this encompasses any value that the convertible noteholders would recover from both the tax unity NOLs and non-tax unity NOLs.

Accelerated Relocation Payments

Intelsat could be entitled to approximately $4.9 billion of ARPs from the Federal Communications Commission, which, according to the debtors, have a net present distributable value of $3.39 billion as stated in the Cowan declaration. The convert group asserts it is the “proper recipient” of the ARPs because SA is the company’s ultimate parent, was the public company prepetition and was the only entity with an independent board prior to engagement of special committees for other entities. It further contends that the convertible noteholders’ recovery under the plan of roughly 1% of the ARPs’ net present distributable value is too low.

The Zelin declaration states the FCC order directs ARPs to be disbursed to Intelsat License LLC, which is a Jackson subsidiary that holds the company’s C-band licenses, and the debtors note that all of their material assets are housed within Jackson and its subsidiaries. Further, the debtors note that the ARPs exist because of the debtors’ licenses and because the debtors have agreed to stop broadcasting from the C-band by the deadlines in the FCC order, which states that the ARPs should be properly paid to the entity that must stop using the C-band, which is Intelsat License LLC.

The plan contemplates that the $4.9 billion of ARPs flows to the Jackson entities with any additional relocation provided by third parties, the CVRs, flowing primarily to Jackson unsecured creditors and secondarily to ICF creditors. At an April hearing the parties indicated that the value of these CVRs could total $200 million. Neither the initial or amended plan ascribe any value from the CVRs to convertible noteholders, but the convert group sought 10% of the CVRs in a term sheet restructuring proposal disclosed in August cleansing materials.

Fliman’s presentation at the confirmation hearing included a chart indicating that SA’s assets include an ARP settlement value ranging from $30 million to $3.5 billion. Reorg’s analysis assumes value from ARPs of $30 million on the low end and $100 million on the high end, solely for illustrative purposes.

Consent Rights

The declaration of Steven Zelin of PJT, the debtors’ financial advisor, states that ICF “essentially had a consent right over any restructuring of the business” because all of the debtors’ operational assets are held by Intelsat Jackson Holdings SA and its subsidiaries. ICF is the direct parent of Jackson. The declaration states that the convert group argues that SA has an equivalent consent right by way of its indirect ownership and the group asserts that SA should be paid more for the “consent” that Investment Holdings Sarl will give in connection with the amended plan. According to the declaration, the convert group asserted that PJT valued ICF’s consent right at $26 million in February 2020, although Zelin states that “PJT did not and has not estimated a value for ICF’s consent right.”

--Krishan Sutharshana
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