A deal is a deal, right? Not necessarily. The battle between Chase Manhattan Corp. and Motorola Inc. over loans to Iridium LLC, the financially troubled satellite telephone venture, based in Washington, D.C., shows once again that all bets are off when bankruptcy looms. In fact, the case suggests that companies may have more reason than they once did to worry that lenders will cry default at the first sign of trouble--and to anticipate that possibility when negotiating loan agreements in the first place.
Granted, Iridium's problems may be extreme. Designed to provide users with telephone service anywhere in the world at any time of the day, Iridium has soaked up an estimated $5 billion thus far. It has been an operational bust, relying on portable phones that are heavy, expensive, and prone to failure when callers try to use them in buildings or cars.
But Chase didn't wait for Iridium to go broke before demanding that Motorola, Iridium's largest stakeholder, step up to the plate. Seven weeks before Iridium filed for bankruptcy, Chase demanded that $29.4 billion (in sales) Motorola guarantee $300 million of a syndicated bank loan that Chase had put together for Iridium. Motorola and Iridium both denied that the guarantee was required under the terms of the loan. Who's right? That's up to a judge to decide, now that Iridium has filed for protection from creditors under Chapter 11 of the federal bankruptcy code.
In A Bind?
What is publicly known about the disputed loan guarantee is murky, and it's possible that the terms themselves are far from clear. That may reflect the complexities of the venture, and the attendant risks.
"It's a bit of a science-fair project," says Mark McKechnie, a wireless-equipment analyst for Banc of America Securities LLC, in San Francisco. "The economics of the satellite telephone system were such that you basically had to build out and launch the global network before subscribers could sign up. The fixed costs were tremendously high."
None of the parties involved would publicly discuss the event that Chase says triggered Motorola's obligation. But the memorandum of understanding that Chase received from Motorola concerning the loan guarantees appears to be even more binding than a "comfort letter," a document that is often proffered by companies that are helping subsidiaries obtain bank financing. Typically, these letters say that as long as the parent is a part of the ownership group, it will take steps to ensure that the subsidiary can satisfy its financial obligations. While courts have held that these letters are not legal guarantees, they do imply a moral obligation on the part of the companies that sign them.
"Comfort letters are considered something you have to honor, even though they're not legally binding," observes Andrew Rahl, a bankruptcy attorney with the New York law firm Anderson Kill & Olick. "On the other hand, if the issuer of the letter were itself in financial trouble, it wouldn't be enforceable. But a memorandum of understanding would typically be more binding."
What's unclear in Motorola's case is whether the terms of its memorandum require that it make good on its offer to guarantee part of Iridium's bank loan.
Yet some observers contend that even loan agreements for less exotic undertakings are rarely clear enough to avoid contention when a borrower runs into financial difficulty, and that this simply reflects the inevitable tension between borrower and lender over their respective shares of a deal's risks and returns. From that perspective, the pretrial skirmishing between Chase and Motorola may best be understood as negotiating tactics. "This could be a murky situation and the lawyers from each side are saying that they can win the case, or [Motorola's refusal] could be a ploy to eventually pay off, but to win a bigger chunk of the company after the payoff," says Edward Altman, a professor of finance at New York University's Stern School of Business. In fact, there were widespread but unconfirmed reports last August that Motorola, which already had an 18 percent equity stake in Iridium, would inject more money into the venture if Iridium bondholders would swap their debt for an equity stake in a restructured firm.
Still, some observers contend that Chase's move reflects a new aggressiveness on the part of lenders to protect their interests. "Banks are getting tougher in their workout mode, and they're moving quicker," Rahl. asserts. "They're also not afraid to move against a prominent company."
That would be understandable. Banks walk an increasingly fine line when a loan to a high- profile customer starts to go sour. On one hand, the bank wants to retain access to that customer's future business, assuming the company can work through its current difficulties. On the other hand, banks, like other businesses, are under ever-increasing pressure to perform on behalf of their own shareholders, a task that includes minimizing loan losses.
Note that Chase was not seeking a guarantee from Iridium itself--a shaky enterprise that may or may not survive--but from Motorola, an A+-credit company with which Chase, one of the biggest players in the syndicated-loan market, would undoubtedly like to do more business in the future.
Also, Chase can afford to take a harder line in the current environment. "The economy's pretty benign right now, so there's probably less reason to carry customers than there might be in more difficult periods," observes Raphael Soifer, a financial services analyst with Brown Brothers Harriman & Co., a New York investment banking firm.
Others suggest that structural change in the loan market gives Chase still more leeway to play hardball. As lending has come increasingly to resemble a securities market, with banks syndicating large chunks of their loans to other banks and institutional investors, originators needn't worry so much about cutting off borrowers at the knees. The reason is simple: Borrowers have less leverage to demand that lenders allow them to work through tough times.
"The concern has been that you would have nobody to negotiate with, nobody who knows your business, who has seen you operate over a period of time, who understands you and has seen you bounce back before, and who would therefore have the confidence to tide you over," says Martin Fridson, chief high-yield strategist at Merrill Lynch & Co. "Instead, there would just be this somewhat anonymous group of quasi-security holders, who would see the numbers going down, push the button, and force you into bankruptcy. I don't know if it would be fair to say there's been a change and those fears have been realized, but it's certainly a question worth asking."
Chase may also have felt pressure to act quickly because of the speed with which Iridium crashed. Says one bankruptcy attorney: "Typically, ventures of this size take some time to go bust. But these folks went from flying at 35,000 feet down to ground zero in the space of six months."
Yet others contend that Chase would have acted this way in any case. "I don' t think [the dispute] is unusual," NYU's Altman contends. "Anything is negotiable in a bankruptcy reorganization. And very rarely is any document so clear-cut that there's no doubt about who's right and who's wrong. As long as there is any degree of murkiness, one could argue one particular issue for broader, more-strategic purposes."
To be sure, there's no guarantee that Chase's early claim will help it to fare any better now that Iridium has entered into bankruptcy proceedings. But as Rahl explains, it can't hurt.
"Almost nothing good happens with a delay in a restructuring when you're in Chase's position," Rahl says. "As time goes on, things could happen that could derail your efforts to get your money. If there's something you want, it's almost always better to go after it sooner rather than later."
In true, never-say-die engineering spirit, Motorola now hopes to see Iridium revived just as quickly as it faltered. In a statement issued shortly after Iridium's Chapter 11 filing, Motorola said it was "optimistic" that the venture could be restructured within 30 days.
In early October, cellular-phone pioneer Craig McCaw was reported to be considering taking a large stake in Iridium, which analysts say could go a long way to help the venture emerge from Chapter 11. In their view, an investment by McCaw would do much to convince other investors that financial and marketing mistakes were more to blame for Iridium's problems than its technology.
But Iridium still hadn't been restructured as this issue went to press. And Chase, for one, wasn't holding its breath.
----------------------------------------------- --------------------------------- A Little Misunderstanding
Very little about the dispute between Chase Man-hattan Corp. and Motorola Inc. over Iridium LLC is clear. Here's what is, more or less.
Chase arranged an $800 million secured bank facility for the satellite phone venture in late 1998. (An additional loan, for $750 million, was backed by Motorola.) According to subsequent filings that Motorola made with the Securities and Exchange Commission, the credit agreement contained covenants requiring Iridium to satisfy certain minimum revenue and customer levels as of various dates. On March 29, Iridium announced that it would not meet its first-quarter 1999 revenue and customer requirements. It never did, although it did receive a series of waivers to those requirements from its lenders, the last one expiring August 11.
In its second-quarter 10-Q filing with the SEC, Motorola reported that it had also agreed, under a "memorandum of understanding," to guarantee up to an additional $350 million of Iridium debt for Iridium's use, subject to certain conditions. It also said that subject to certain conditions, $300 million of that amount could be used to guarantee amounts borrowed under the syndicated loan led by Chase.
By late August, vulture investors were trading rumors, alluded to in Mobile Communications Report, an industry newsletter, that Chase was claiming that Iridium had somehow "fudged its numbers" going into the loan, perhaps relating to the number of Iridium subscribers. Iridium had launched its satellite telephone service on November 1 of last year. Three months later, it conceded that it had few paying customers. Nine months after the launch, in fact, Iridium still had only about 20,000 customers, a far cry from the 500,000 it has targeted for year-end 1999.
Nobody has come forth who would say publicly that executives at either Iridium or Motorola lied. However, in a class-action lawsuit on behalf of certain Iridium stockholders filed last April, attorneys at the Washington, D.C., law firm of Finkelstein, Thompson & Loughran alleged that Iridium, Motorola, and certain officers and directors of Iridium issued "false and misleading statements and failed to disclose material facts concerning the Iridium system, including misrepresentation and omissions concerning the capabilities of the system, the timing of 'commercial availability,' certain revenue targets, and the company's ability to meet certain covenants with its lenders."
Ambulance-chasing? Stay tuned.