Based on first-quarter operating results projections, Iridium L.L.C. likely will fall short of the
revenue and subscriber addition targets stipulated in its bank loan agreements, and the company said it expects to
modify its future milestones to avoid defaulting on its bank covenants.
While quarterly operating results often fall
short of expectations, Iridium is especially concerned because it relies on meeting pre-set milestones in order to receive
additional financing from its bank facilities-in particular, its $800 million senior secured credit agreement.
The bank
covenants require Iridium have at least $4 million of cash revenues, $30 million of accrued revenues and 27,000
subscribers by March 31. At the end of 1998, Iridium had about 3,000 subscribers and few expect the figure to rise fast
enough to meet its first-quarter target.
After initial news reports highlighted the situation, Iridium issued a statement
saying it currently is not in any discussions to change these targets, but “we do expect that we will be working
with our banks to modify these milestones going forward.”
Standard & Poor’s Corp. March 1 downgraded
about $2.8 billion in debt owed by corporate entities related to Iridium, lowered its speculative grade corporate credit
and secured bank loan debt ratings on Iridium Operating L.L.C. and Iridium Capital Corp. to B- from B, and lowered
its senior unsecured debt rating to C+ from B-. It placed these ratings on CreditWatch “with negative
implications.” However, S&P affirmed its AA- rating on an unsecured bank loan from Motorola Inc., which has
no operational requirements.
In defense of its network, Iridium officials pointed to a lack of available service and
product-not lack of market demand-for the lower-than-expected numbers.
Iridium is no stranger to start-up
challenges. During the launch phase, it experienced inoperable satellites and handset testing delays that led the
company to postpone its original September commercial activation deadline. Once operational on Nov. 1, Iridium then
found Motorola was having handset manufacturing ramp-up issues, and Kyocera Corp. still wasn’t meeting its handset
performance requirements.
Now that the handset problems have been resolved, the company said it does not yet
have the fully trained sales channels worldwide necessary to quickly sell the product, an issue of ongoing
concern.
“We expect that, as more service providers begin actively selling Iridium products and services over
the next few weeks, Iridium’s presence in the market will increase,” read the statement.
Iridium has played
somewhat of a poker game in terms of the financing question. From the get-go, Iridium had to meet deadlines in return
for additional funding. Its original $1 billion loan from Chase Manhattan Bank was divided into four installments.
During the launch phase, the company was required to place a certain number of satellites in orbit before the banks
would loan it the money to launch more. For the final $250 million installment, Iridium needed to secure the necessary
licensing agreements to cover 72 percent of its business plan and commercially activate the network.
Some say the
quality of Iridium’s network was not at a level that would stand up to mass-market demand under normal
circumstances. But since there was no competitive alternative, the company did so anyway to receive its needed
financing, figuring it could strengthen the network over time before the next competitor entered the market.
For its
part, Iridium tends to blame its problems on the incredible technical and organizational challenges associated with
building, operating and selling a global voice network based on 66 low-earth-orbit satellites and not to a lack of interest
among users.
“It is important to note that the causes of the delays in Iridium’s subscriber ramp-up have not
been associated with the level of market demand for our product,” it said in the statement. “This is not an
indication of how Iridium will fare in the months ahead, nor does it affect the company’s ability to meet its debt
payment obligations. We believe our banks will agree and will continue to support the Iridium
program.”
However, Iridium’s share price fell from $27.31 on Feb. 25 to $19.50 at press time, the week during
which the first-quarter revelations and subsequent speculation were revealed.
