Sea Launch Co., a bankrupt Boeing subsidiary that propels into space rockets carrying private payloads, on Dec. 3 landed court approval for $12.5 million in debtor-in-possession financing.
The company, represented by debtors' counsel Dennis J. Connolly and Matthew W. Levin at Alston & Bird and attorneys from Young Conaway Stargatt & Taylor in Wilmington, Del., filed an emergency motion for DIP financing with the U.S. Bankruptcy Court for the District of Delaware, claiming that it needed $5 million immediately to continue operations. Sea Launch, which is based in Long Beach, Calif., and has launched the “Rock,” “Roll” and “Rhythm” satellites for XM Satellite Radio as well as satellites serving entities including DirecTV and NATO, sought authority to borrow $25 million, but presented the court with a negotiated commitment for $12.5 million.
It's not easy to get DIP financing these days, and Connolly credited investment bank Jefferies & Co. with conducting a global search for the money. The lender, whose principal investors are financial entities and players in the space and telecommunications industries, is Houston-based Space Launch Services. It was represented by attorneys from Baker Botts and Edwards Angell Palmer & Dodge. Boeing, which is a guarantor on some of the loans, is represented by Richards, Layton & Finger.
Bankruptcy Judge Brendan L. Shannon approved the $12.5 million loan, writing that Sea Launch may use the money to fund operating expenses, working capital, transaction fees associated with the loan and professional fees and expenses—including legal fees—subject to court approval and not exceeding $350,000 per month in the aggregate.
Shannon also noted in his order that the debtors were unable to obtain unsecured credit, or secured credit at better terms, elsewhere.
That's not surprising, given Sea Launch's financial state. The company reported in its bankruptcy petition and other documents liabilities in excess of $1 billion and assets that were less than $500 million.
According to an affidavit filed early in the bankruptcy by Sea Launch's chief financial officer, the company owes Boeing more than $760.8 million; Boeing's most recent 10-Q, filed with the Securities and Exchange Commission in October, indicates that Boeing has recourse to $971 million in receivables from Sea Launch and its partners. Sea Launch also racked up an additional $119 million in cost overruns during its development phase, among other debts.
Another factor pushing the company to reorganize, according to the court file, is a failed launch, which took place in January 2007 when an accident destroyed a rocket and a Dutch telecommunications satellite before they even left the launch pad. That unsuccessful launch delayed other scheduled launches, costing the company money and customers.
The customer on the failed launch, Hughes Network Systems, demanded a refund of its advance payments and interest. This spring, a panel of arbitrators concluded that Sea Launch owed Hughes $52.3 million. Connolly said Hughes filed to confirm the arbitral award in superior court in California, but that action is stayed during the pendency of the bankruptcy litigation.
With debts looming, Sea Launch filed for Chapter 11 reorganization in June, and asked the court for DIP funding in November.
The commitment letter and the term sheet for Sea Launch's DIP facility, which are exhibits in the court file, show that this is a super priority priming secured term loan, meaning that its repayment takes precedence over Sea Launch's other secured debts. The interest rate is based on a minimum 3 percent London Interbank Offered Rate, or LIBOR, plus 300 basis points, and Sea Launch will pay a closing fee of 2 percent. If at some point the company elects to get credit from another lender instead of completing its commitment with Space Launch Services, it will pay a break-up fee of $250,000.
Connolly said his client expects to receive the remaining $7.5 million in DIP financing within the next 30 to 60 days. He said the search is on for more funding.
“This is a unique debtor,” he said. “There really isn't another provider quite like it in the world.”
Mentioning the specialized skill sets necessary to operate the business, not just from a scientific standpoint but from the perspective of dealing with multinational treaty obligations related to Sea Launch's peaceful use of rockets that possess weapons-potential technology, he added, “I think there will be interest among equity players because there's an amalgam of assets that isn't easily replaceable and has a value that will be of interest. The challenge is figuring out how to translate that into a financing structure.”
Sea Launch was founded in 1995 by Boeing Commercial Space and Communications, Norwegian investors and corporations owned by the governments of Russia and Ukraine. The company was designed as a private, low-cost alternative for launching satellites, most of which, at that time, were launched out of government facilities with long waiting lists.
To date, the company has completed about 30 launches, including one for Georgia-based Intelsat on Nov. 30. The launches either take place from a land-based launch pad at a space center in Kazakhstan or from the Odyssey, a huge, sea-based, floating launch pad at the equator (satellites launched at the equator get the biggest boost from Earth's rotation and travel the shortest route into orbit).
But the economy has changed since the company's founding in the go-go mid-1990s.
“The debtors are actively pursuing launch opportunities with numerous customers,” Brett A. Carman, Sea Launch's vice president and chief financial officer, said in an affidavit filed with the court. “However, the Debtors' operating results have been negatively impacted by the worldwide economic recession, a glut of available launch slots operated by competitors, and the Debtors' precarious finances.”