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Rating Action:

Moody's assigns Caa2 CFR to Ligado; outlook stable

05 Oct 2020

New York, October 05, 2020 -- Moody's Investors Service (Moody's) has assigned a first-time Caa2 corporate family rating (CFR) and a Caa2-PD probability of default rating (PDR) to Ligado Networks LLC (Ligado). Moody's has also assigned a Caa1 rating to Ligado's proposed $3.26 billion of senior secured first lien debt (First Lien Debt) and a Ca rating to the company's proposed $1.04 billion of four-year senior secured second lien notes (Second Lien Notes). The outlook is stable.

The First Lien Debt is expected to be primarily comprised of three-year senior secured first lien notes (First Lien Notes) with a smaller three-year senior secured first lien term loan (First Lien Term Loan). Under the contemplated structure both the First Lien Term Loan and First Lien Notes will have interest payable in a set combination of cash and interest payable through pay-in-kind (PIK) components over their respective three-year maturities. In addition, an estimated $285 million of the gross proceeds from the First Lien Debt issuance, an amount equal to two years of the cash interest component, will be deposited into an escrow account (Escrow Account) that will be pledged as security until such amounts are released when the cash interest payment components become due and payable. The net proceeds from the First Lien Debt and Second Lien Notes will be used to repay all amounts outstanding under Ligado's existing senior secured first lien loan and senior secured 1.5 lien loan, make a $700 million lump sum payment to Inmarsat Global Limited (Inmarsat) under the terms of the company's fifth amendment to a cooperation agreement (Cooperation Agreement) with Inmarsat, fund the Escrow Account and for general corporate purposes. Any increase in the proportion of First Lien Debt in the capital structure relative to the expectation of $1.04 billion of Second Lien Notes issuance will put pressure on the First Lien Debt rating of Caa1.

On September 25, 2020, Ligado entered into a restructuring support agreement (RSA) with holders of its existing junior lien loan and equity units (collectively, Existing Junior Instruments) to simplify its junior capital structure. On October 1, 2020, the company secured 100% support from holders of all of its Existing Junior Instruments to consummate the transactions contemplated by the RSA, including holders of its existing junior lien loan exchanging such loan into a new preferred equity tranche (New Preferred Tranche) and the holders of the existing equity units retaining their interests in Ligado. The New Preferred Tranche is treated as common equity under Moody's methodology. This exchange under the RSA serves to extend the company's overall debt maturities by terminating obligations under the existing junior lien loan, establish new financing costs and terms and specify formulas for potential future principal recoveries for holders of the New Preferred Tranche and existing equity units.

Moody's assigned ratings are contingent upon the successful completion of the debt issuance and refinancing. If the debt issuance and refinancing is not completed, Moody's expects to withdraw all ratings.

Assignments:

..Issuer: Ligado Networks LLC

....LT Corporate Family Rating, Assigned Caa2

....Probability of Default Rating, Assigned Caa2-PD

....Senior Secured 1st lien tem loan due 2023, Assigned Caa1 (LGD3)

....Senior Secured 1st lien notes due 2023, Assigned Caa1 (LGD3)

....Senior Secured 2nd lien notes due 2024, Assigned Ca (LGD6)

....Outlook, Assigned Stable

RATINGS RATIONALE

Ligado's Caa2 CFR reflects the company's small scale and historical business track record managing only a mobile satellite services (MSS) business. The company's services and equipment revenue are small relative to the size of its debt load and have been in steady decline over the last several years. Companies with small scale are less able to tolerate market dislocations, periods of stress, adverse events or strategic missteps relative to larger companies. Ligado's strategic objective to build a business model that incorporates terrestrial wireless applications for its L-band spectrum faces significant execution hurdles and uncertainties. Given limited liquidity, early missteps could lead to credit impairment that reduces near term financial flexibility. Ligado is currently pursuing several paths to improve its credit trajectory, including the development of an organic business model targeting several existing or new end markets. In addition, the company could monetize the value of the L-band spectrum it controls via leasing transactions with potential end users or the potential outright sale of the company itself, but the level or nature of such current or future of interest in the company's L-band spectrum remains unknown.

Ligado benefits from the April 2020 FCC regulatory approval of its MSS license modification to permit use of 30 MHz of its greenfield L-band spectrum for ancillary terrestrial component use cases, or more simply terrestrial wireless use cases. The Cooperation Agreement with Inmarsat benefits both Ligado and Inmarsat and provides a framework for the coordinated and efficient use of L-Band spectrum that each company is separately licensed to use currently. The primary purpose of the Cooperation Agreement, which expires in 2107, is to create larger and contiguous L-band spectrum blocks for the respective use cases of Ligado and Inmarsat as separate companies. What is commonly referred to as L-band spectrum is found in the low end of the 1 GHz to 6 GHz mid-band spectrum range, or the 1 GHz to 2 GHz spectrum range. Under the Cooperation Agreement Ligado's current access to 30 MHz of L-band spectrum for terrestrial wireless use cases resides in the following ranges: 1526 MHz to 1536 MHz (a 10 MHz band of lower downlink spectrum), 1627.5 MHz to 1637.5 MHz (a 10 MHz band of lower uplink spectrum), and 1646.5 MHz to 1656.5 MHz (a 10 MHz band of upper uplink spectrum). This combined 30 MHz of three non-contiguous 10 MHz blocks of L-band spectrum is complemented by an additional 5 MHz of L-band spectrum in the 1670 MHz to 1675 MHz range currently leased from Crown Castle International Corp. (CCI, Baa3 stable). The CCI block is currently leased through October 1, 2023 and is also FCC-authorized for use for terrestrial wireless purposes. In addition to L-band spectrum licenses Ligado holds currently, the company has a call option that allows it to obtain the spectrum license now held by CCI, and which it currently leases. Ligado has a call option with Inmarsat which reduces and provides certainty to the future financial obligations associated with L-band spectrum it coordinates usage with and leases from Inmarsat through 2107 under the Cooperation Agreement, but Inmarsat would still retain those spectrum licenses. Despite this regulatory support under the FCC's April 2020 order, outcomes from potential Congressional legislative actions and ongoing opposition to the FCC order from non-government stakeholders and government agencies, including the Department of Defense, are unpredictable and could create adverse consequences or delays to the continued advancement of a sustainable business strategy. In addition, FCC auctions totaling 450 MHz of spectrum over the period from August 2020 and likely through year-end 2021 -- which includes 70 MHz of CBRS spectrum already auctioned, an anticipated upcoming auction of 280 MHz of C-band spectrum in mid-2021, and a likely late 2021 auction of 100 MHz of spectrum in the 3.45-3.55 GHz range -- could negatively impact spectrum market supply/demand dynamics and diminish the potential demand for and validity of certain attributes associated with Ligado's technical positioning with its control currently of a block of 35 MHz of non-contiguous L-band spectrum.

Moody's believes the primary value proposition of Ligado's L-band spectrum is the spectrum's potential use under downlink and uplink decoupling. Under such a configuration, referred to as a C+L configuration, wireless communication between a low power wireless device and a cell tower would be facilitated over a wireless uplink using L-band spectrum to a cell tower that is coupled with a wireless downlink from that cell tower back to the wireless device using C-band spectrum. Such a configuration can potentially reduce the tower infrastructure expansion necessary for nationwide wireless carriers to deliver 5G wireless services using C-band spectrum alone, thus reducing capital spending intensity and lowering the time to get to market. Given the better propagation characteristics of L-band spectrum versus C-band spectrum, and especially under low power, the use of this C+L configuration would likely eliminate the need to densify much of the industry's existing tower infrastructure to facilitate the dual use of C-band spectrum for uplink and downlink needs. However, with no historical terrestrial wireless operations or current terrestrial wireless market share, visibility into both the viability and market acceptance of any of Ligado's business model strategies are subject to both demand uncertainties and high execution risks. The company's existing MSS business has not demonstrated positive revenue trends or margin stability and is unlikely to support future operating and business development costs, spectrum acquisitions or spectrum lease renewals, and/or debt refinancing needs without significant increases in either operating cash flow or continued capital infusions. Consequently, Ligado's visible and currently very weak operating credit metrics, which are expected to persist over at least the next two-to-three years, are a main contributor to the rating outcome.

Moody's views Ligado's liquidity as adequate over the next year. After the close of the company's $4.3 billion debt raise of First Lien Debt and Second Lien Notes and its $700 million payment to Inmarsat, the company will have pro forma total unrestricted cash liquidity of about $225 million. The company does not currently have a revolving credit facility. This liquidity is critical as Ligado's internally generated cash flow currently cannot cover the company's SG&A and other operating costs. In addition, the company's stated business objectives include potentially acquiring 5 MHz of additional L-band spectrum currently used by the National Oceanic and Atmospheric Administration (NOAA) targeted for auction by the FCC in 2021. While there could be risks to obtaining the debt financing necessary to fund this potential purchase of NOAA L-band spectrum, Moody's expects the use of any senior secured first lien debt would be limited and that junior debt would be the primary source of debt funding. Moody's expects available cash liquidity will dwindle steadily such that cash liquidity in about 9 months would only be sufficient to meet an additional 18 months of internal cash needs. Although Ligado is expected to have sufficient liquidity through year-end 2022, Moody's currently considers 18 months of liquidity as necessary to support a continued stable outlook.

There is the potential for modest to strong asset protection for Ligado's debt holders through the implied value embedded in its spectrum license holdings and spectrum license leases. Spectrum is a finite resource that historically does not depreciate, but the valuation of the company's 30 MHz of greenfield L-band spectrum is largely unproven and speculative. This L-band spectrum has coverage and throughput capacity properties that support its potential immediate use to deliver increases in current broadband speeds to terrestrial wireless users under the 5G protocol. But 5G remains in an early evolutionary stage and mid-band spectrum, generally, may provide a less capital intensive and lower cost means to provide 5G coverage to select and denser population portions of the country. C-band has sufficient propagation characteristics and is capable of boosting wireless capacity to deliver multi-fold increases in current broadband data speeds and throughput versus existing 4G LTE technology.

As Moody's views Ligado's business strategy as also being akin to that of a levered speculative investment, inputs into the assessment of Ligado's credit profile also include an assessment of the asset protection afforded the company's debt holders through a rudimentary valuation of the L-band spectrum it controls. Using the midpoints of a third party's valuation assessments under two scenarios -- one assuming 5G deployment using L-band spectrum for both uplink and downlink communications and a second assuming 5G deployment using the C+L configuration described earlier -- and discounting those estimated valuations by approximately 50% under a formulaic but relatively conservative treatment, Moody's currently assumes Ligado's L-band spectrum asset value could range between $5.75 billion and $8 billion and be subject to meaningful volatility. The expected $3.26 billion of First Lien Debt would have collateral protection in excess of 1.7x to 2.4x, or effective loan-to-value ratios of approximately 41% to 57%. Including the $1.04 billion of Second Lien Notes with the $3.26 billion of First Lien Debt, collateral protection through the $4.3 billion of aggregate First Lien Debt and Second Lien Notes would be in excess of 1.3x to 1.9x, or effective loan-to-value ratios of approximately 54% to 75%. Assuming maintenance of sustainable liquidity in excess of 18 months, this conservative assessment of asset protection further reinforces both Moody's current ratings and outlook.

The instrument ratings reflect the probability of default of Ligado, as reflected in the Caa2-PD PDR, an average expected family recovery rate of 50% at default, and the loss given default (LGD) assessment of the debt instruments in the capital structure based on a priority of claims. The First Lien Term Loan and First Lien Notes are rated Caa1 (LGD3), one notch above the Caa2 CFR, given the loss absorption support provided by the company's Second Lien Notes, which are rated Ca (LGD6). The First Lien Term Loan and First Lien notes benefit from a first priority security interest in substantially all of the existing and future assets of the company and its guarantors, with the exception of security interests in spectrum licenses which are not permitted under the terms of the licenses or applicable law, rules or regulations. The Second Lien Notes will be secured on a second priority basis in the same collateral. The First Lien Term Loan and First Lien Notes have first priority to proceeds received in the event of default or a sale of assets (which can include spectrum licenses), and the Second Lien Notes may not receive any proceeds until 100% of the combined First Lien Term Loan and First Lien Notes claim has been satisfied. The First Lien Term Loan and First Lien Notes are guaranteed on a senior secured first lien basis by each of the company's existing and future wholly owned domestic and Canadian subsidiaries, and the Second Lien Notes benefit from the same guarantees but on a senior secured second lien basis.

The stable outlook reflects Moody's expectations that the company will maintain 18 months of liquidity to fund internal cash deficits and that it will make steady progress towards its development of a sustainable business model able to support its sizable funded debt.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given the company's weak fundamentals a ratings upgrade is unlikely at this point. The ratings could be upgraded over time if the company makes progress in the development of a sustainable business model or otherwise monetizes the spectrum it controls in a manner which demonstrates sustainability of the capital structure.

Downward pressure on the rating could arise should the company's liquidity deteriorate or should execution of its development of a sustainable business model falter.

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Ligado Networks LLC is focused on bringing additional lower mid-band spectrum to market and accelerating the deployment of next-generation mobile networks that deliver advanced and innovative connectivity services. Since emerging from bankruptcy on December 7, 2015, the Company has been working with the FCC and the global positioning system industry in order to put to use the current 35 MHz of terrestrial spectrum it controls for next-generation services. The company's plans include offering the benefits of satellite coverage and the provision of terrestrial network capabilities to deploy custom private networks for a diverse customer base supporting key industries within the transportation, public safety, energy, utilities and agriculture sectors. Ligado generated $10.0 million of revenue in the last 12 months ended June 30, 2020.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Neil Mack, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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