[Satellite News 01-11-10] TerreStar has cleared a foreign ownership regulatory hurdle with the U.S. Federal Communications Commission (FCC) and expects to receive its Ancillary Terrestrial Component (ATC) authorization in the near future, TerreStar General Counsel Doug Brandon told Satellite News.
    “I am confident that we will get the ATC authorization very soon,” said Brandon.
    The authorization would allow the company to operate its two-way voice and data service via the TerreStar-2 satellite under a common carrier license. Brandon said TerreStar, which has more than a 25 percent foreign ownership ratio concentrated in the Cayman Islands, had to secure a regulatory foreign ownership waiver from the FCC in order to be approved for the ATC license. “The process to clear this hurdle took a very long time, and we’ve been working on it since we applied for [an] ATC [license] back in September 2007. The FCC even told us that our ATC application was ready for decision, but that it was just waiting for this procedural hurdle,” said Brandon. “The good news is, the FCC just granted our request to go above the 25 percent threshold on the week of Christmas, and the ATC grant should follow soon.”
     The importance of TerreStar’s ATC application was highlighted in an Oct. 12 e-mail from TerreStar Senior Vice President and Deputy General Counsel Alexandra Field to Karl Kensinger, associate chief of the FCC’s satellite division. In the e-mail, Field told Kensinger that TerreStar might default on its TerreStar-2 satellite loans if the company did not receive an ATC license by Jan. 20. TerreStar secured loans in February 2008 for TerreStar-2 from EchoStar Corp., Harbinger Capital Partners Master Fund and Harbinger Capital Partners Special Situations Fund.
     “The deal under which we got financing for our second satellite — the one that will anchor the ATC — has an event of default related to ATC authorization,” Field wrote. “If we don’t secure the FCC ATC authorization by three months after the date we’ve certified that we are operational to the FCC, then the interest rate on the money we borrowed to build the satellites increases. The interest increases again for each of the next two months. If, however, we have not received our authorization from the FCC by the third month, it is deemed an event of default against the loan. … The real hit is January 20, 2010. Given how far we’ve gone on the second satellite and the fact that we will be in money raising mode by end of this year [2009], triggering the event of default would likely be catastrophic to the company.”
    Brandon said Field’s comments were not entirely accurate. “Sasha does regulatory work with the FCC for us. The language she used in the e-mail was selected from an advocacy point of view. Karl Kensinger is the person at the FCC working on our application, and I think Sasha just wanted to communicate the reasons why we needed the ATC license sooner than later and the potential consequences.”
    Brandon did confirm, however, that Field accurately outlined TerreStar’s debt situation. “The fact is, we have lots of debt out there in the market. One piece of our debt is a credit agreement that we have with two borrowers, and it has certain time-related interest increases that are linked to the ATC license. The interest on our debt has stepped up due to the current ATC timeframe. It started to increase three months after July 20 and there was another one at the end of December. But the deal is set up so that the interest is paid at the end of the loan in 2014. The other thing to know is that the increased interest rate steps back down again once the license is granted, and that the increased rate is only active during the time that we didn’t have it. With any luck, that time will only cover three to six months.”
    Brandon stressed that an event of default would not be “catastrophic” for TerreStar. “There is an event of default for the loan on January 20, but its different than a regular default. It just triggers a notice provision and gives us time to then talk to the lenders about curing the default, and that curing process can take a variety of different ways under the loan agreement. One of the ways to cure it is to have the ATC application to be granted during the pendency, or we can negotiate with the lenders and they waive the penalty of default.”
     TerreStar-1, currently in orbit, is still in testing for its ground-based calibration system, according to Brandon. “We expect testing to be completed soon, with commercial activation still on track for first or second quarter of this year,” he said.
    Separately, TerreStar informed the FCC Jan. 4 that EchoStar President Dean Olmstead and EchoStar CFO David Rayner left TerreStar’s board, effective Dec. 31, 2009. TerreStar told the FCC that Olmstead and Rayner’s decisions were not based on disagreements with TerreStar policy and that it would consider filling the vacancies at a later date.
    Brandon said the resignations were not related to TerreStar’s loan status with EchoStar. “It was just coincidental timing. They quit at the end of the year. There was no relationship between the ATC application timing or the foreign ownership threshold,” he said.
    TerreStar’s board currently seats six members, and Brandon said EchoStar, which has the right to nominate two members, most likely will submit replacements this summer.