Lenders to Iridium LLC, the global satellite phone provider, may suffer the same fate as debtholders in Europe's Channel Tunnel project, analysts say.
"Chunnel syndrome" occurs when a company with a sound business idea gets caught under a mountain of highly leveraged debt resulting from an overly optimistic business plan.
Iridium, with lower-than-expected subscriber rates and revenues, is struggling to repay $2.25 billion of debt, including an $800 million highly leveraged syndicated loan led by Chase Manhattan Corp. and Barclays Bank PLC.
This month, the company defaulted on a $90 million interest payment to bondholders. Now it appears Iridium will try to offer those bondholders a combination of new bonds and equity to avoid bankruptcy.
Lenders and bondholders are meeting with Iridium management and bankers from Donaldson, Lufkin & Jenrette to restructure the debt. One of three scenarios is likely to result, debtholders said:
*A revised covenant package which requires only a simple majority for approval.
*New repayment and maturity terms that require about 95% approval.
*A filing for bankruptcy protection in which lenders and debtholders would be required to accept a court-ordered repayment plan.
Bankers are not likely to find any of these proposals ideal. Said one debtholder, "The bank debt is trading significantly below par, which means bankers are expecting a little bit of a haircut."
Analysts said Iridium's plan to offer a truly global phone network probably sounded like a good idea to banks and investors. But what may have been overlooked - as is often the case in such deals - was how long that good idea would take to turn into strong revenues.
"It's our fault and it's the market's fault," said Phelps Hoyt, a telecommunications debt analyst at KDP Investment Advisors Inc. in Montpelier, Vt., which holds an undisclosed amount of Iridium bonds. "We gave them the money. Of course, because they've got senior debt, the banks aren't as stupid as the bondholders are."
Though participants in the bank loan now see a company on the brink of bankruptcy, they appear to have known some of Iridium's risks when the financing was completed late last year.
The two-year term loan was priced at the London interbank offered rate plus 4 percentage points - one of the highest interest rates charged on a syndicated loan last year. But its short maturity suggested that bankers were overly optimistic about Iridium's initial money-making ability.
That optimism clearly is haunting bankers now. In March, only three months into the loan, Iridium's management requested forbearance on repayment. That forbearance has stretched into more than three months of nonpayment.
"There are a lot of other companies out there doing the same thing," Mr. Hoyt said. "There are business-plan types of companies that are getting money that's more like venture capital than loans. There is a more general question of, 'Should those kinds of companies be allowed to have these loans?'"