Telesat CEO Dan Goldberg in 2020. The satellite company's bondhonders are taking it to court ahead of debt deadlines.Justin Tang/The Globe and Mail
Lenders to Ottawa-based Telesat Corp. TSAT-T are accusing the satellite operator of illegally moving the value of its “crown-jewel asset” – its low-Earth-orbit satellite business – out of their reach ahead of looming debt-repayment deadlines.
Telesat has US$1.7-billion of debt maturing in December, with nearly US$450-million more coming due in 2027, according to a lawsuit filed Wednesday by a group of the company’s creditors in the Supreme Court of the State of New York.
The Wilmington Savings Fund Society, an administrative agent, filed the lawsuit on behalf of creditors holding 90 per cent of the US$1.7-billion of debt.
The group also filed a similar, separate lawsuit in Ontario Superior Court on Wednesday. The Canadian lawsuit also names individual company directors as defendants.
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The creditors allege in the U.S. suit that Telesat Canada, a subsidiary of Telesat Corp., transferred 62 per cent of the equity of its low-Earth-orbit, or LEO, business to another Telesat Corp. subsidiary last September to move it away from creditors because the company is “indisputably insolvent” and unable to pay its debt.
“In effect, Telesat Canada sacrificed lender recoveries in a desperate bid to shield equity, which amounts to textbook fraud,” the lawsuit alleges.
Telesat president and chief executive Dan Goldberg said the company was within its rights to make the transfer.
“We operated within our covenants. We operated within the law. We exercised best governance practices in coming to the decision and we’re very comfortable with the action that we took,” Mr. Goldberg said.
The lenders allege that they repeatedly tried to engage in negotiations with the company but were rebuffed.
“Rather than engage, the company ignored its debtholders and audaciously attempted to transfer its crown-jewel asset out of its creditors’ reach, in clear violation of its contractual obligations and applicable law.”
The allegations have not been proven in court.
Telesat announced on Sept. 12 that it had distributed 62 per cent of the equity of its Lightspeed business to an indirect subsidiary of Telesat Corp. that is a “non-guarantor under Telesat Canada’s debt documents.”
Telesat has been spending heavily to build out Lightspeed, a constellation of low-Earth-orbit satellites. The project is still under way after years of delays stemming from financing challenges and pandemic-related supply chain issues.
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Unlike its existing fleet of geostationary satellites, each of which stays in a fixed spot about 36,000 kilometres above an area of Earth, the new satellites would orbit just 1,000 kilometres above the Earth, cutting down on the distance that broadband signals need to travel. That would reduce latency, the industry term for lag time.
Telesat has secured $2.54-billion in funding from the federal government and the Quebec government to build Lightspeed.
The creditors allege that the asset transfer has left them with the geostationary, or GEO, business, which is in “steady and irreversible decline,” and only a minority stake in the LEO business that they in part funded.
They also allege that the transfer was “riddled with blatant conflicts of interest” because the directors who orchestrated it own stakes in the parent company, whose share price benefited from the transaction.
MHR Fund Management LLC and Public Sector Pension Investment Board together own the majority of Telesat Corp.’s equity. Mark Rachesky, the founder and chief investment officer of MHR, chairs both the Telesat Corp. and Telesat Canada boards.
“After the transaction, while Telesat Canada’s equity fell deeply underwater by over a billion dollars, Telesat Parent’s publicly traded stock soared. The value of the conflicted directors’ stock soared by over 35%, increasing the value of MHR’s stock by over $30-million CAD in one day,” the lawsuit reads.
Telesat’s bonds are trading at heavily discounted levels and with high yields according to Bloomberg data, suggesting financial distress and the unlikelihood of full repayment.
Shares of Telesat closed at $38.00 on the Toronto Stock Exchange Wednesday, down $10.06 or 20.9 per cent. On the Nasdaq, it closed at US$27.39, down US$7.27 or 20.98 per cent.
In May, credit-rating agency Moody’s downgraded Telesat Corp.’s corporate family rating from Caa1 to Caa2, citing refinancing risk.
“Our Caa2 rating signals an untenable capital structure and high likelihood of a debt restructuring because the debt is tied to the GEO business, which is structurally challenged,” Peter Adu, a vice-president and senior credit officer at the agency, said in an e-mail.
“It is likely the stock price is reflecting the LEO project, which will ensure the company’s long-term survival,” he added.
The lenders are asking the court to void the September transaction, so that the equity in Telesat’s LEO business remains available to them, and to protect them from further asset transfers in violation of the credit agreement. They are also seeking damages and costs.