(Bloomberg) -- Bondholders had long been fretting about Charlie Ergen’s Dish Network Corp. His latest move turned those fears into a nightmare.
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A bid to transition once-mighty Dish from its shrinking pay-TV niche to wireless services made strategic sense, sure. And Ergen, known for clinching last-minute deals and navigating tricky financial situations, just succeeded in recombining Dish with his healthier satellite operator, EchoStar.
But it still has to compete with established giants in the wireless arena, meet federal deadlines to build out its 5G network and fund those expensive initiatives. That’s a conundrum for a company with more than $20 billion of debt, several billion dollars of which is coming due in a hurry. The market remained worried.
This week, creditors saw some of their worst anxieties play out: Dish announced it was moving its crown-jewel wireless spectrum licenses — among other assets — out of reach of the bondholders, cutting the value of billions in existing debt. The moves smacked of divisive financing maneuvers that have pitted creditors against one another in recent years. Some of its bonds careened in response, extending declines Thursday to record lows.
Dish’s actions mark an aggressive start to what will be one of the biggest corporate debt battles of the year. It positions the company to potentially raise new money backed by some of the same assets it dangled years ago to attract the investors now outraged by their shrinking collateral.
“Who as a lender wants to give a company more money if it pulls moves like this?” said Mark Levin, a co-founder of the debt advisory firm Asterisk Capital. “With this transaction, you have two very significant sources of value being taken away from bondholders, and it seems they’re getting nothing in return.”
Sharp Elbows
Yet, the world of distressed debt has no shortage of sharp-elbowed players drawn to risky deals. Any fresh money the company raises using the moved assets as collateral would likely rank higher than all existing claims in the repayment line. These kinds of maneuvers have consistently conjured billions of dollars for companies that were up against a wall.
Dish’s shuffled assets included chunks of the subscriber base of its pay-TV business and a claim to $4.7 billion in an intercompany loan.
In contentious asset moves of the past, the shifted collateral included the likes of trademarks and other intellectual property, as in the case of retailer J. Crew. The preppy clothing seller’s legal maneuvers allowed it to raise new debt — and buy financial breathing room — but sparked years of creditor litigation and ultimately failed to keep it out of bankruptcy.
In the case of Dish, some battle lines are already being drawn. One group of creditors has hired investment bank Lazard and law firm Milbank for advice on how to respond to the asset moves, Bloomberg reported. For its part, EchoStar tapped Houlihan Lokey and White & Case as financial and legal advisers, according to a statement.
They’ve got their work cut out for them. Dish has around $13 billion of debt maturing through the end of 2026, and about $3 billion of that comes due in 2024 alone, according to data compiled by Bloomberg.
The company has “massive, massive cash needs,” said Stephen Flynn, a telecom analyst with Bloomberg Intelligence. And while investors surely foresaw the company’s need to raise money, the sudden bond selloff suggests holders were caught flat-footed by this week’s announcement, he said.
Dish’s 5.75% notes due 2028 ended trading Tuesday at about 78 cents on the dollar, according to pricing source Trace. They plunged soon after the company’s announcement early Wednesday morning, and fell further Thursday to as low as 64.5 cents.
Analysts at debt research publications CreditSights and Covenant Review called Dish’s move surprising and disappointing, even for investors used to Ergen’s frequent pivots.
“We think much of the trust in Charlie Ergen has been lost, and these transactions simply add to the fatigue of being a Dish investor,” the analysts wrote in a joint report Wednesday.
--With assistance from Todd Shields, Michael Tobin, Erin Hudson and Jill R. Shah.
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