UPDATE 2: 7:17 p.m. ET 4/29/2021
: This evening, the Intelsat debtors filed a notice
of modified scheduling dates related to the convertible noteholder ad hoc group’s standing motion and SES’ intervention motion. The revised schedule, as set forth below, provides that the hearing on the motions will be set as part of an order on the debtors’ disclosure statement, which is set for hearing on May 27
at 11.a.m. ET. Continue reading as our Americas Core Credit team analyzes and reviews the Intelsat FCC payment schedule and Request a Trial for access to the linked documents as well as our analysis and reporting on hundreds of other stressed, distressed and performing credits.
UPDATE 1: Intelsat SA Responds to Conflict Allegations, Defends Plan Settlement, Calls Convertible Group Claims ‘Noise and Distraction’
UPDATE 1: 5:08 p.m. ET 4/15/2021
: This afternoon the special committee of the Intelsat SA board of directors filed a response
defending itself against “unsupported and irresponsible” statements made in the parent entity convertible noteholder group’s omnibus objection (discussed below). The special committee maintains that it “negotiated for a meaningful recovery” of $60 million for the convertible noteholders in the debtors’ plan settlement “against strong resistance from the Jackson Crossover Group and other parties.” In doing so, the special committee argues, it “faithfully fulfilled its duties” to pursue Intelsat SA’s claims to, among other things, $4.9 billion in FCC accelerated relocation payments.
“Given the choice between the bankruptcy cases devolving into a litigation quagmire, as the Ad Hoc Group and the Jackson Crossover Group would have it, and pursuing confirmation of the Proposed Plan and the settlements contained therein, for which the ISA Special Committee worked so hard, it should not be a surprise that the ISA Special Committee believes the Court should go with the latter option,” the response states.
The special committee also maintains that the convertible group “provides zero factual or legal support” for its position that the members of the committee suffer from “massive conflicts of interest,” and calls the special committee’s allegations “nothing more than concocted theories” and “noise and distraction.”
Original Story 4:32 a.m. UTC on April 15, 2021
Intelsat Debtors Call FCC Payments Standing Motions ‘Baseless’; Jackson Creditor Groups, Parent Creditors Join Chorus of Objections
Debtors and Special Committee Objection - Convertible Group Motion
Debtors Objection - SES Motion
Parent Company Ad Hoc Creditor Group Objection
Jackson Ad Hoc Group Objection
Ad Hoc Secured Noteholder Group Joinder
Jackson Crossover Group Objection - Convertible Group Motion
Jackson Crossover Group Objection - SES Motion
Jackson Unsecured Trustee Objection
Convertible Noteholders’ Limited Objection - SES Motion
Parties in the Intelsat cases continue to stake out their positions in the fight over the ownership of $4.87 billion in anticipated C-band/5G spectrum “accelerated relocation payments
” from the U.S. Federal Communications Commission, or FCC. The ad hoc group of Intelsat SA convertible noteholders and Intelsat’s former C-Band Alliance
partner SES Americom’s separate motions
seeking standing to bring suits claiming ownership of the relocation payments on behalf of Intelsat SA and Intelsat US, respectively, have drawn several objections. Parties opposing the ad hoc convertible noteholder group and SES’ requests for standing include the debtors and special committee of independent directors at Intelsat SA, an ad hoc group of parent company creditors and numerous Jackson creditors including the crossover ad hoc group, the Jackson ad hoc group, the secured notes ad hoc group and the Jackson unsecured trustee.
The objectors argue that the relocation payments are in fact owed to the Intelsat entity licensed by the FCC to use the C-band, Intelsat License LLC. The filings also assert that the court should deny the derivative standing motions since the debtors have already proposed a settlement of any competing claims to the payments as part of an intercompany settlement embodied in their chapter 11 plan
In addition, the convertible noteholders filed a limited objection to SES’ motion, agreeing that the dispute over the accelerated relocation payments is a “gating issue” to the bankruptcy that should be adjudicated by the court. However, the convertible noteholders object to SES’ position that the payments belong to Intelsat US, insisting that Intelsat SA is the entity that the FCC sought to incentivize.
The court has scheduled
a trial on the standing motions for June 14 at 11 a.m. ET. Replies in support of the motions are due on June 10.
The debtors filed objections to both standing motions, with the special committee of independent directors of Intelsat SA included in the debtors’ objection to the convertible noteholders’ motion. The debtors focus heavily on the point that the claims at issue would be settled pursuant to their proposed plan and attack each of the standing proponents’ motivations. The convertible noteholders only “filed the [standing] [m]otion after they failed to persuade any party in these chapter 11 cases that they were entitled to more,” the debtors say. “The Converts understood that the parties— including many holders of the same convertible notes—were close to reaching a settlement that (if anything) would give them less
than the [Intelsat SA] Special Committee achieved, and filed the Motion as an instrument to create leverage [b]ut the settlement contained in the proposed Plan touches on dozens of issues of equal or greater import, and there is no basis to deny that settlement and instead permit collateral, multi-party litigation over a narrow subset of claims,” the objection stresses.
Turning to SES, the debtors posit “[t]here is even less reason to grant” SES’ “procedurally and substantively baseless” motion. Even assuming the Fourth Circuit recognized the doctrine of derivative standing (which the debtors note it has not), the objection says that SES, as the debtors’ largest competitor, “is the worst conceivable proxy for a fiduciary.” SES’ motion “is mostly a continuation of its smear campaign against the debtors,” the objection alleges and “is simply not how bankruptcy works.” Returning to the theme that the settlement in the plan sufficiently deals with the claims at issue, the debtors say SES, like “all other creditors,” “will have every opportunity to advance its opposing assertions about payments flowing from the FCC Order during plan confirmation proceedings.”
Espousing the merits of the settlement embodied in the plan, the debtors observe that the claims the standing parties seek to file “were pursued by the Debtors, through special committees for conflict matters, for months
in negotiations among five special committees and three ad hoc groups with representation throughout the debtors’ capital structure, including at Intelsat S.A.” These vigorous, multilateral negotiations resulted in a plan settlement including these claims among multiple additional issues, the debtors note. The plan’s proposed resolution of the claims the convertible noteholders seek to pursue “is a recognition of reality,” the debtors say, explaining that the special committee “considered the claims and, while advocating for them in connection with negotiations with the other debtors and creditors, realized that litigation was (and is) ultimately a road to nowhere.”
In a limited objection to SES’ motion to intervene, the convertible noteholders agree with SES that determining which debtor is entitled to the accelerated relocation payments is the “critical gating issue in these Chapter 11 cases,” adding that the court should adjudicate the issue without allowing “conflicted back-room settlements,” but criticize that SES’ motion to intervene is premised on the erroneous claim that Intelsat US is entitled to the accelerated relocation payments. “They do not” belong to Intelsat US the objection states bluntly, insisting instead that they are the “sole entitlement” of Intelsat SA, the “ultimately corporate parent of the Intelsat companies.” The objection states that this is true on the basis of three legal and factual premises.
First, the convertible noteholders contend that the accelerated relocation payments are not “compensation for any license” and therefore such payments do not belong to license-holding subsidiaries of Intelsat Jackson. The objection explains that the FCC’s order directing Intelsat and four other satellite operators to relocate operations from the lower 300 MHz of the C-band spectrum “could not have been clearer” that “[i]ncumbent space station operators are not ‘selling’ their spectrum usage rights.” The convertible noteholders insist that the debtors’ own proposed disclosure statement contains language to the same effect.
The objection points out that the accelerated relocation payments are not compensation for the relocation work itself. According to SES, the convertible noteholders argue, Intelsat US should receive the accelerated relocation payments because Intelsat US “is performing the spectrum clearing work for which the proceeds will be earned.” The convertible noteholders disagree, insisting that the FCC order provides a “distinct form of compensation,” that is separate from the accelerated relocation payments, “to reimburse, at cost, the party performing ‘clearing work.’” On this basis, the convertible noteholders state that if Intelsat US were the party performing the clearing work, then it would be entitled to such reimbursement payments. However, “that would be the sum total of any compensation belonging to Intelsat U.S.,” the objection concludes.
According to the convertible noteholders, to uphold the FCC’s policy objective, the accelerated relocation payments must belong to the company that can deliver accelerated clearing. The objection distinguishes the reimbursement payments from the accelerated relocation payments, noting that the latter are “incentive payments for whichever company causes the spectrum to be cleared faster.” The objection again points to the debtors’ disclosure statement as support for this position. Because of this, the objection says, determining which estate is entitled to the accelerated relocation payments necessarily turns on “which company can ensure the accelerated clearing that the FCC wanted to incentivize with Accelerated Relocation Payments.” The convertible noteholders suggest that “incentivizing anybody else is a waste of government resources.”
The objection says that publicly available information and limited discovery has confirmed that Intelsat SA is the company the FCC wanted to incentivize. The convertible noteholders explain that “Intelsat S.A. is the parent company that historically dictated all operational and strategic decisions for the entire Intelsat enterprise.” This role was “equally true” with respect to the FCC order, the filing says, adding that, among other examples, Intelsat SA decided how fast to clear the spectrum. The convertible noteholders underline that it was Intelsat SA that employed the executives responsible for the operational and strategic decisions of the enterprise, and it was the board of Intelsat SA that had ultimate authority for those decisions. Accordingly, in the convertible noteholders’ telling, because Intelsat SA was the company that the FCC order meant to incentivize, the accelerated relocation payments belong to Intelsat SA.
Jackson Crossover Group Objections
The Jackson crossover ad hoc group
, which has not signed on to the debtors’ plan support agreement, calls the convertible noteholder group’s standing motion the “latest in a long series of attempts by creditors of Jackson’s out-of-the-money parent companies,” the HoldCos, to “seize value” from Jackson Holdings and its subsidiaries. The Jackson crossover group calls the HoldCos “shells” with few assets other than the shares they own in their respective subsidiaries.
The Jackson crossover group says the final rules adopted by the FCC make it clear that Jackson subsidiary Intelsat License LLC will receive any accelerated relocation payments from the FCC. Only FCC licensees may receive such payments and the licensee within the Intelsat entities is Intelsat License, also the only entity to hold FCC authorizations or U.S. market access grants that cover C-band satellites, the filing says. The objection emphasizes that Intelsat License is an indirect Jackson subsidiary and guarantor of the Jackson unsecured notes and that “no intercompany obligations of Intelsat License LLC are alleged or exist that would direct any distributable funds to any entities above Jackson.”
The objection contends that the accelerated relocation regime “would be undermined if an essentially empty, seven-plus-times-removed parent company entity were to receive $4 billion while its subsidiary entities that hold the licenses and own the relevant assets receive nothing.” The Jackson crossover group insists that the FCC order defines “Intelsat” as “Intelsat License LCC [sic]” and not as Intelsat SA or as the entire corporate group.
According to the Jackson crossover group, the convertible noteholders’ proposed complaint is “so untethered from law, fact, and policy that it does not approach the ‘colorable claims’ threshold” applied in other courts that have sometimes permitted derivative standing suits. The convertible noteholders have failed to show that they meet the “strict conditions” that the Fourth Circuit has indicated are required to recognize derivative standing, “(as it has not done to date).”
In a separate objection to the SES standing motion, the Jackson crossover group reiterates its arguments on Intelsat License LLC being assigned the accelerated relocation payments. The filing adds that SES is seeking preemptively to file litigation claiming those payments for Intelsat US instead, either by intervening in the convertible noteholders’ litigation, by obtaining standing to bring its own complaint on behalf of Intelsat US, or both. However, the objection says that SES’ standing request “makes no sense” since a party cannot “logically intervene in a hypothetical proceeding.”
The Jackson crossover group says that SES’ request for derivative standing should also be denied because SES would never be a proper party to represent Intelsat US LLC’s interests. SES is not a “well-intentioned, unbiased creditor” but instead the debtors’ “foremost business rival and an active litigant” with disputed proofs of claim against each debtor entity, the filing argues.
Jackson Ad Hoc Group Objection/Ad Hoc Secured Noteholder Group Joinder
The Intelsat Jackson ad hoc group
, a PSA party supportive of the debtors’ proposed restructuring, likewise argues that the accelerated relocation payments are owed to Intelsat License as the Intelsat entity that is actually licensed by the FCC to use the C-band. This position is supported by “the plain terms of the applicable FCC order, federal regulations, longstanding FCC practice, and common sense,” says the group’s objection to both standing motions.
The filing reasons that without the underlying C-band licenses held by Intelsat License, there would be no opportunity to receive the acceleration payments and that it was Intelsat License that submitted an accelerated relocation election in May 2020, notifying the FCC that it had “elected to perform an accelerated relocation as defined in the [FCC’s] rules.”
Practically, the Jackson ad hoc group says, the entity licensed by the FCC is the only entity in direct privity with the FCC, making it “the most logical and administratively practical recipient of any funds through the FCC-administered clearing process.” The objection urges the court to reject the convertible noteholders’ argument that Intelsat SA as the ultimate corporate parent should receive the payments because it is responsible for any “FCC penalties.” Moreover, neither the FCC order nor applicable regulations say that the entity that performs some or all of the “work” of relocating to the upper portion of the C-band is entitled to the acceleration payments, says the filing, instead, the payments are owed to Intelsat License as the entity that holds the C-band licenses.
The Jackson ad hoc group also argues that even if the movants had colorable claims to the accelerated relocation payments, “(and they do not),” have derivative standing should not be granted because the claims are the subject of a pending settlement in the form of the plan. The objection asserts that derivative standing should only be granted when the debtors have unjustifiably refused to pursue the claims at issue, a factor absent here. The filing contends that the plan settlement “provides for over $60 million in value for creditors of Intelsat S.A. and substantial value for creditors of Intelsat US.”
The objection emphasizes that the debtors have appointed independent directors and formed special committees “at each primary layer of the capital structure,” with the Intelsat SA special committee assessing the Intelsat SA claims and negotiating to obtain value for its creditors. In response to SES’ arguments, the Jackson ad hoc group says that “nothing requires a debtor to appoint a special committee at each legal entity where intercompany claims may exist in order to settle such claims.” The objection says that if the convertible noteholders and SES are unhappy with the plan settlement, the proper course is for them to object to plan confirmation instead of obtaining standing and opening “a Pandora’s box of lengthy and value-destructive litigation[.]”
The ad hoc group of secured noteholders
filed a joinder to the Jackson ad hoc group’s objection without adding further argument.
Jackson Unsecured Trustee
The Jackson unsecured trustee asserts broadly that Intelsat SA’s failure to pursue the convertible group’s and SES’ proposed claims is reasonable, as neither are colorable. The objection notes that Intelsat License is the “only Debtor to whom ARPs are granted under the Clearing Order and its implementing Rules.”
The objection states that when analyzed under state law and the Bankruptcy Code, the accelerated relocation payments belong to Intelsat License, which is also the licensee of the FCC licenses. The economic value derived from the licences belongs to the Intelsat License estate, the group concludes. As such, the objection argues, the value of the accelerated relocation payments must flow first to the creditors of Intelsat License, including the Jackson unsecured trustee on behalf of the Jackson unsecured noteholders and “potentially other Debtors (including Intelsat US) pursuant to valid intercompany claims.” The Jackson unsecured trustee explains that “excess value (if any) will flow upwards according to the Debtors’ corporate structure.” According to the filing, under these principles, neither Intelsat SA nor Intelsat US has a direct interest in, or legal claim to the value of, the accelerated relocation payments. Thus, the objection asserts, the motions’ claims are not colorable under state or bankruptcy law.
The motions similarly fail to assert colorable claims under the FCC clearing order, the Jackson unsecured trustee argues, stating that Intelsat License is the only debtor that satisfies the clearing order rules’ definitions. The objection adds that FCC licenses “convey operating authority to their holders and do not extend to other members of a licensee’s corporate family,” thus Intelsat License is the only eligible incumbent space station operator obligated to perform under the clearing order. By the same logic, if Intelsat License were to fail to meet the accelerated milestones, the clearing order “makes clear that the consequences will be imposed on it, and no other party,” the objection continues.
The Jackson unsecured trustee characterizes as meritless the convertible group’s position that the accelerated relocation payments must belong to Intelsat SA because it is “‘ultimately responsible’” for penalties if Intelsat License does not clear the Lower C-band on the necessary timeline and that the ARPs are intended to incentivize operators. The objection states that this argument would first require the court to supplant state and bankruptcy law with federal common law. Second, the objection says that “even if the Court looked beyond the Clearing Order’s plain meaning (which, respectfully, it should not do), S.A. could never be the ‘operator’ the ARPs are designed to incentivize.” The filing explains that Intelsat SA is not an “operator” but rather, “[i]t is, by design, a non-operating holding company.”
Moreover, the objection disputes that Intelsat SA bears “‘ultimate responsibility’” under the clearing order, insisting that Intelsat S.A in fact bears no responsibility and any potential enterprise liability the FCC might seek to impose in the future is “too uncertain and attenuated to justify ignoring the plain meaning of the Clearing Order to give S.A. a direct right to the ARPs.”
The Jackson unsecured trustee asserts that SES’ proposed claim also fails for similar reasons. “Absent ‘powerful countervailing considerations,’” the FCC does not “‘interfere with legitimate business transactions that assign rights and responsibilities among legally separate entities’ or ‘determine the pecuniary interests of any individual debtor or creditor,’” the objection says. The Jackson unsecured trustee points out that the clearing order and rules “plainly deliver the ARPs to Intelsat License and leave issues regarding their allocation among the Debtors and their respective creditors for determination under principles of corporate and debtor-creditor law.” Even if under those principles Intelsat US may have unsecured intercompany claims against Intelsat License, Intelsat US has no direct claim to the ARPs, which belong to Intelsat License, the objection concludes.
The Jackson unsecured trustee also includes a joinder to the Jackson crossover group objection.
Ad Hoc Group of Parent Company Creditors
The ad hoc group of parent company creditors
asserts that the standing and intervention motions should be denied, as the proposed plan not only enjoys “substantial creditor support” but “reasonably resolves the Intercompany Claims sought to be asserted by the Standing/Intervention Motions.” Moreover, the objection points out that the movants’ contentions about the value of the intercompany claims and determination of the ownership of the accelerated relocation payments “can and should” be heard in connection with confirmation of the proposed plan, warning that granting the standing/intervention motions would “derail the Plan confirmation process.”
The objection states that the proper allocation of the accelerated relocation payments, which other parent companies in addition to Intelsat SA claim entitlement to, was one of the many issues that the parent creditor group resolved with the debtors in negotiating the plan. Moreover, “as significant holders of the Convertible Senior Notes issued by ISA” - with the group members holding $129 million or 32% of convertible senior notes outstanding, the parent creditor group says that it has “exhaustively analyzed the arguments raised in the Standing/Intervention Motions and has an obvious interest in ensuring that they are properly resolved.”
Although not supportive of the standing requests, the parent creditor group argues that if the court does grant either or both of the motions, then it too should be granted leave to intervene on behalf of ICF, LuxCo and Envision. The objection reasons that the convertible group does not represent all creditors of Intelsat SA and should not be granted exclusive authority to litigate the intercompany claims on behalf of Intelsat SA. “To the extent that the convertible group’s claims rest upon the contention that the FCC payments should be shared with ISA,” the objection insists that “the same rationale would give rise to an entitlement to some or all of those payments on the part of the other parent companies.”
The parent creditor group asserts that although the convertible group argues “only the ‘ultimate parent corporation’ is responsible for paying FCC penalties,” that assertion “is contrary to FCC precedent.” The objection continues, “FCC orders make it clear that the FCC will, in appropriate circumstances, assess penalties based on the revenues of all affiliated companies, not just those of the ultimate parent company.”
Relying upon the convertible group’s own arguments, the parent creditor group contends that there is no basis to conclude that Intelsat SA alone, as only one member of a corporate group, is entitled to the accelerated relocation payments. Rather, the objection explains, “the FCC is empowered under the Communications Act to levy penalties on affiliated entities collectively.” Accordingly, the parent creditor group maintains that under the convertible group’s theory, the other parent companies - including ICF, Envision and LuxCo - may also face FCC penalties and would be entitled to a share in the accelerated relocation payments.