As DISH DBS Exchange Pits DTV Against DBS Noteholders, Each Side Shows Willingness to Negotiate Around Framework; Despite Sticking Points, Acquisition Serves Interests of All Acquisition Parties

 

Key Takeaways
 

• EchoStar yesterday, Oct. 28, announced an extension of its exchange offer and consent solicitations for DISH DBS Corp., or DBS, notes, with the exchange offer expiring on Nov. 12 at 5 p.m., ET as opposed to today. The new expiration time aligns with the final date to which EchoStar may extend the exchange under the DBS purchase agreement.
   
• Given the size of the ad hoc DBS noteholder group, which Octus has reported includes holders of over 80% of DBS notes principal, in our view the two-week extension sets the stage for a bilateral negotiation between the ad hoc DBS noteholder group and DirecTV. The initial exchange offer implied a minimum average principal participation level of 84% across each series of DBS notes, based on the exchange’s minimum discount capture requirement and proposed deal consideration, while the amended offer implies a 95% participation minimum requirement.
   
• Although sticking points remain, we believe that closure of the DirecTV acquisition is in the best interests of all transaction parties. In our opinion, a number of avenues exist to potentially close the gap between the parties, while downside risks for all parties remain if no agreement is reached. In Octus’ view, with two weeks remaining under the exchange, the amended exchange agreement and recent press reports are both indicative that the ad hoc DBS group and DirecTV are willing to work to a resolution under the proposed exchange framework.
   
• We expect normal-course tax-sharing payments and satellite lease payments, as well as a likely DBS-to-DNC third-quarter intercompany advance to consume the bulk of the $1.52 billion permitted cash transfer cap under the DirecTV purchase agreement. This cap provides for the payment of certain amounts from DBS to DNC for the period from July 1, 2024, to Sept. 30, 2025

 

While DirecTV negotiated its proposed acquisition of EchoStar’s pay-TV business directly with EchoStar, the exchange conditions under the agreement pit DirecTV in a direct negotiation with the DBS noteholders. Under the terms of the agreement, DirecTV has the right to terminate its acquisition if the DBS noteholders do not accept the DBS exchange offer “on terms satisfactory to DIRECTV.” This includes the extent to which the exchange fails to achieve its required “Acquisition Consent Threshold Condition,” which includes a requirement that, upon the DirecTV acquisition, the exchange offer results in a minimum principal reduction of the outstanding DBS notes. This minimum principal reduction amount was $1.568 billion in the initial exchange offer and lowered to $1.499 billion in the Oct. 28 amended exchange offer.

Even so, according to Octus’ reporting on Oct. 25, the DBS noteholders asserted that DirecTV and DBS have so far excluded them in negotiations.

In a letter dated Oct. 24 from the DBS noteholder’s counsel, Milbank, to DirecTV’s counsel, Ropes & Gray, the noteholders stated that EchoStar is asking them to “voluntarily forfeit over $1.56 billion in value they are owed.” The Milbank group represents holders of over 80% of the aggregate DBS notes principal, according to Octus’ reporting, with certain members party to an ongoing lawsuit that alleges that EchoStar’s January reorganization transactions amounted to fraudulent transfers.

However, while sticking points remain, based on last week’s Financial Times report of the DBS noteholders’ willingness to realize an approximately $300 million discount and EchoStar’s recently reduced minimum principal reduction amount and increased consideration amount in the amended exchange offer, both sides appear willing to negotiate around EchoStar’s proposed exchange framework.

Ultimately, Octus believes that closure of the DirecTV acquisition is in the best interests of all transaction parties, including the dissenting DBS noteholders. A failure to consummate the DirecTV transaction leaves the DBS notes at a credit box with less credit support and earnings power going forward. Further, to the extent that the transaction is not consummated, absent legal intervention or a settlement, DBS noteholders would be exposed to the risks of further cash distributions from DBS to DNC, new liability management exercises and related notes pricing pressure as year-end approaches.

Separately, TPG Angelo Gordon, which plans to increase its 30% stake in DirecTV to 100% ownership, now controls DBS’ unrestricted subsidiary DBS Issuer LLC, or SubscriberCo, via its new preferred equity stake and holds at least $1.8 billion in subscriber-backed term loans at the entity, each of which subordinates legacy DBS noteholders with respect to the subscribers at SubscriberCo. According to sources, if the DirecTV acquisition does not close, the capacity of TPG’s SubscriberCo rollup term loans, also known as a hunter-gatherer facility, expands from $500 million to $1.5 billion, potentially further subordinating legacy DBS bondholders with respect to the SubscriberCo assets.

Additionally, EchoStar announced on Oct. 10 that it had satisfied the ongoing DNC convertible notes exchange offer’s minimum tender participation threshold, setting the company on course to strip the restrictive covenants from its convertible notes.

Combined, these developments, and the possibility of a refinancing of the DNC 11.75% secured notes in May 2025, potentially make any future liability management exercises at DBS more potent as they provide EchoStar with options in how it ultimately treats DBS.

A summary of the broader EchoStar complex of companies is shown below. With holders representing over 90% of DNC’s convertible notes participating in the DNC notes exchange, following consummation of the exchange, fewer than $490 million of the convertible notes will remain outstanding. The 11.75% DNC secured notes due 2027 will be the only issuance at DNC with restrictive covenants.

A more detailed EchoStar organizational chart is shown below:

A summary of the transactions that EchoStar announced on Sept. 30, and updated Oct. 28, along with important dates, is shown below:

 

Acquisition Closure Benefits EchoStar, DirecTV and DBS Noteholders; 2 Weeks Remaining Under Agreement Deadline

Given the two weeks remaining until the amended exchange expires and indications that both the DBS noteholders and DirecTV are willing to negotiate around the framework of the existing exchange offer, the lack of direct negotiations thus far do not alter our expectation that a mutually satisfactory agreement will be reached with the DBS noteholders.

Financial Times, citing sources, reported that DBS noteholders have pushed to narrow the initially proposed $1.568 billion discount to about $300 million. Under the terms of the proposed new notes, this discount would be realized upon the consummation of DirecTV’s acquisition. On DirecTV’s side, the Oct. 28 amended exchange offer includes a reduction of the minimum discount amount to $1.499 billion and increases in the exchange consideration provided to the DBS unsecured noteholders.

Octus has reported that DBS noteholders disagree with:
 

While these negotiating points, among others, remain in play, strictly considering the discount element, it appears that the “bid-ask” spread in reaching a potential resolution lies between a roughly $300 million discount on DBS’ $9.75 billion in aggregate non-2024 notes principal amount and the amended $1.499 billion discount on those notes.

For DirecTV, we believe that two significant factors, among others, are driving its exchange participation requirement:
 

In our view, a number of avenues potentially exist to close the gap between the parties, including possible tweaks to the minimum discount capture threshold, the aforementioned covenants of the exchange notes, the permitted cash transfer cap and/or EchoStar’s retention of $211 million cash on DBS’ balance sheet, as of June 30, under the transaction. While the covenants under the new exchange notes are not public, Octus believes it is likely that, from a negotiating standpoint, EchoStar and DirecTV likely initiated the exchange with documents providing weak covenant protections with the anticipation that such covenants could be altered in negotiations, serving as a meaningful value enhancement to induce an agreement.

Notably, according to sources, the exchanging DBS noteholders would retain their litigation rights to the extent that the DirecTV acquisition does not close.

Current trading volumes are limited by the size of the DBS co-op group, but, in our view, pricing for the DBS notes and the yield of DirecTV’s outstanding secured notes indicate that market participants expect a certain amount of discount, via the exchange consideration and/or consideration trading prices, to be realized by DBS noteholders.

(Click HERE to enlarge.)

Normal Course and Completed Payments Likely Represent Roughly $1.3B of $1.52B Transfer Cap

The aforementioned $1.52 billion permitted cash transfer cap provides for the payment of certain amounts from DBS to DNC from July 1, 2024, to Sept. 30, 2025. These include normal course tax-sharing payments and satellite lease payments.

DBS and DNC have historically operated under a tax-sharing agreement under which DBS has sent recurring tax payments to DNC. It is Octus’ understanding that, under this arrangement, the entities share a taxable income base with the combined entities benefiting, from a tax perspective, from the losses incurred at DNC. Thus, these payments from DBS, at least in part, would otherwise likely be made to applicable tax authorities if the arrangement ceased.

Additionally, the transfer cap allows for new intercompany loans. Based on historical trends, DBS’ payment capacity and DNC’s cash needs, Octus estimates that DBS likely advanced roughly $500 million in intercompany loans to DNC during the third quarter. While these would have occurred prior to the announcement of the DirecTV transaction, they would be counted in the cap.

As summarized below, combined, the 15 months of anticipated tax and satellite payments as well as the third-quarter intercompany loan advances might account for roughly $1.3 billion to $1.4 billion of the $1.52 billion in allowed transfers.

Starting in the fourth quarter of 2023, as shown below, DBS began making intercompany loans to DNC to fund its network buildout and other cash needs. DBS referred to these as an “ordinary course business practice.” However, effective in the second quarter, DBS and DNC determined that the balance of the intercompany loans had become “longer-term in nature” and the entities entered into an intercompany loan agreement. The DBS litigants are challenging these loans, the balance of which stood at $1.5 billion outstanding as of June 30.

As discussed, the transfer cap also provides for payments for satellite lease capacity, including on satellites EchoStar X, EchoStar XI, EchoStar XIV, EchoStar XV, EchoStar XVI, EchoStar XVIII or EchoStar XXIII. Each of these satellites was located at the DNC credit box as of June 30 except for EchoStar XV and EchoStar XVII, which were at the DBS credit box. It is unclear if these two satellites were moved from the DBS credit box after the second quarter.

Octus’ summary of the purchase agreement’s permitted cash transfer cap provision is below. It is notable that the purchase agreement specifically states that the proceeds from up to $500 million in SubscriberCo incremental term loans, which it states are expected to be $480 million on a net basis, would count toward the $1.52 million permitted transfer cap. It would not surprise us if EchoStar reports that such a payment was made following the third quarter end.

(Click HERE to enlarge.)