Globalstar Telecommunications Ltd. took a bold, albeit peculiar, step last week, announcing it is suspending indefinitely principal and interest payments on all its funded debt, including its credit facility, vendor financing agreements, senior notes, dividend payments and preferred stock.
Globalstar was supposed to pay $45 million in interest and principal payments on its Loral Space & Communications Ltd. credit facility and Qualcomm Inc. and Loral vendor financing agreements on Jan. 15, but failed to do so.
The company explained the payment freeze as a necessary action in order to have sufficient funds for the progress of its marketing and service activities. The move is expected to conserve approximately $400 million of the company’s cash for 2001, and enable the continuation and further deployment of its satellite-based services around the world.
Globalstar said it had $195 million in cash available as of Dec. 31, which will be used to support its ongoing obligations to employees, customers and suppliers.
“This will give service providers the time required to add fuel to their new marketing efforts,” said Bernard Schwartz, chairman and chief executive officer of Globalstar, during a conference call for investors.
Schwartz chose his words carefully when trying to explain to investors and shareholders why the company was going to such drastic measures to stay afloat.
The mobile satellite company has been struggling since it first launched commercial service last February. Schwartz said Globalstar had about 31,200 customers at the end of the fourth quarter-well below the 500,000 Globalstar itself said it would need to break even.
“There’s no question that the take-up rate up to this point has not been what we would have liked,” Schwartz said.
Schwartz emphasized the excellent performance of the network itself, and seemed confident that the company and its service providers needed only more time to reevaluate their marketing strategies to obtain the kind of subscriber numbers it had hoped for all along.
Schwartz also noted that there are no planned or expected layoffs, and service would not be altered or interrupted.
In separate statements, Loral and Qualcomm “endorsed” Globalstar’s decision. Qualcomm said it is “evaluating the effects” of the decision.
“We believe current and new product offerings support an expanding market for Globalstar service and we expect the system to continue to operate in the future,” said Dr. Irwin Jacobs, chairman and CEO of Qualcomm.
Globalstar launched one of those new product offerings in December. Now available, Globalstar Data Services gives customers Internet access, e-mail and instant messaging for about $1.50 a minute-the same as voice-and is expected to help boost subscriber numbers.
Schwartz, who also is chairman and CEO of Loral, said Globalstar’s actions relieve its partners, including Loral, of any necessity to provide additional funding to Globalstar this year. Loral will continue to support its joint participation in service provider franchises in Brazil, Canada, Mexico and Russia.
As of Dec. 31, Loral said its direct and indirect investment in Globalstar totaled approximately $1.3 billion. Qualcomm said it has invested about $610 million.
Globalstar retained The Blackstone Group as its financial adviser.
In related news, Standard and Poor’s lowered its corporate and senior unsecured debt ratings of Globalstar L.P. to “D” from “CCC,” and lowered its corporate credit and preferred stock ratings on Globalstar Telecommunications Ltd. to “D” from “CC.”
