EchoStar Bankruptcy Remains Credible Path Without Further FCC Certainty; DNC, DBS, HSSC Credit Boxes Also Likely to File If Strategy Is Pursued

 

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After EchoStar’s decision to skip its approximately $326 million interest payment on its 10.75% spectrum secured notes last week, starting the clock on the company’s 30-day grace period, signs point to EchoStar’s willingness to enter bankruptcy protection absent clarity from the Federal Communications Commission on its intended actions pending the review of Echostar’s S-band spectrum licenses and prior 5G network buildout extension.

Consistent with this decision, on June 2, subsidiary DISH DBS Corp. did not make approximately $183 million in aggregate interest payments due on its 5.25% secured notes due 2026, 5.75% secured notes due 2028 and 5.125% unsecured notes due 2029, triggering the entry into 30-day grace periods under those DBS indentures as well.

As the status of EchoStar’s buildout-related spectrum licenses remains in limbo, with the currently open FCC proceedings leaving the treatment of its crown jewel AWS-4 licenses unknown, it is unclear how EchoStar could get adequate confidence to make its topco notes payment by the June 29 grace period expiration date. It remains in question whether a deescalatory off-ramp even exists.

It also remains uncertain how a quickly evolving D.C. landscape, with today’s exit of two FCC commissioners as well as the recent public feud between President Donald Trump and Elon Musk, could affect the FCC’s EchoStar-related actions.

Octus’ Latest Views on Bankruptcy, Buildout, Potential Sales

We Expect Credit Boxes Across the Structure to File If DISH Pursues Near-Term Bankruptcy Strategy

To the extent that EchoStar determines that bankruptcy provides it with the best path to preserve the value of its spectrum assets, we expect that the company would look to file its EchoStar topco credit box to protect its AWS-4 and H-block licenses, which are each subject to the 5G buildout commitments. Since other buildout-related spectrum, including the AWS-3, 600 megahertz and 700 MHz E-block licenses, is held at the DISH Network Corp., or DNC, credit box, we would also expect that DNC would file for bankruptcy protection and might even be compelled to do so given the location in the corporate structure of certain AWS-3 related entities that serve as secured guarantors under the topco spectrum secured notes.

A voluntary bankruptcy at DNC would trigger an event of default under each of the DISH DBS Corp. notes indentures. Likewise, a bankruptcy filed by EchoStar topco would trigger an event of default under the Hughes Satellite Services Corp. debt.
 

Filings Indicate a Substantial Portion of Buildout Completed on a Cost Basis

In its January buildout status report and commensurate FCC filings, EchoStar lists the licenses that it attests have achieved 80% or 85% service market coverage as measured by population. On the basis of this information, combined with the FCC’s reported cost basis for each license, and assuming that the FCC has, or ultimately will confirm EchoStar’s drive test, we believe EchoStar has protected a substantial portion of the value of its buildout-related licenses from FCC revocation.
 

Additionally, more recently, the company has submitted a significant number of additional buildout notifications to the FCC, implying that it has protected a meaningful amount of incremental license value since the January report.

3.45 GHz Licenses Appear the Most Saleable With Roughly 1.5B MHz-POP Newly Unencumbered

During the first quarter, EchoStar replaced approximately 1.5 billion MHz-POP of 3.45 gigahertz spectrum licenses serving as collateral for DNC’s $7.6 billion in intercompany loans with its 700 MHz E block licenses, a C-band license and millimeter wave spectrum licenses. This transfer, placing the formerly collateralized 3.45 GHz licenses at the EchoStar topco credit box, leaves these 3.45 GHz licenses as well as the company’s Multichannel Video Distribution and Data Service, or MVDDS/12 GHz, and Citizens Broadband Radio Service, or CBRS, licenses as its most significant unencumbered nonsatellite spectrum.

In our view, the 3.45 GHz licenses, the spectrum of which is not deployed in the company’s network, represent EchoStar’s most marketable licenses. In fact, the company entered an agreement in April to swap six of its unencumbered 3.45 GHz licenses, representing approximately 169 million MHz-POP, to Omega Wireless for certain of their 600 MHz spectrum licenses.

AT&T was the largest participant in the 3.45 GHz auction that closed in January 2022 and is in the process of deploying its licenses. Verizon, which did not participate in the auction, is understood to be deploying its C-band spectrum with dual-band radios that also offer capacity to deliver 3.45 GHz service, making it another potential bidder. Although AT&T’s 3.45 GHz holdings are at the FCC’s 40 MHz cap in markets across the nation, we think it is likely that FCC Chairman Brendan Carr could view such a transaction favorably given his longstanding focus on placing mid-band spectrum into use.

Potentially providing a window into the FCC’s position on the matter, AT&T is asking the commission for a waiver on the four-year cap that expires in 2026 to purchase certain 3.45 GHz licenses from SoniqWave.

Topco Spectrum Secured Notes Default Likely Results in DNC, DBS Note Defaults Due to AWS-3 Secured Guarantors

Although the cross-default provisions under DISH Network Corp. and DISH DBS Corp.’s notes are not directly triggered by a default of EchoStar Corp. debt, an interest payment default under the 10.75% spectrum secured notes or a chapter 11 filing by EchoStar topco appears likely to lead to defaults at DNC and DBS because of the location in the corporate structure of the entities holding the company’s AWS-3 spectrum licenses, which are secured guarantors under the EchoStar topco spectrum secured notes.

In our view, even disregarding this, if the company determines that bankruptcy is the best path to protect its buildout-related spectrum licenses, DNC would likely file for bankruptcy protection given the company’s 600 MHz, 700 MHz E block and AWS-3 spectrum licenses’ location at this credit box.

Under the DNC spectrum notes, it is an event of default if there is a default in payment of principal or interest (after accounting for any grace period) under certain debt of DNC or its restricted subsidiaries, or under debt that is guaranteed by DNC or any of its restricted subsidiaries, in each case exceeding $250 million in aggregate.

As shown below, the following entities that serve as secured guarantors under the topco secured notes are located within the DNC credit box:
 

• Northstar Spectrum LLC;
   
• SNR Wireless Holdco LLC;
   
• Northstar Wireless LLC; and
   
• SNR Wireless LicenseCo LLC.
   

We further assume that these entities are restricted subsidiaries under the 11.75% DNC notes, which do not allow for the post-issue date designation of DNC subsidiaries as unrestricted subsidiaries.

If the EchoStar topco does not make the May 30 interest payment under the 10.75% spectrum notes before the expiration of the 30-day grace period, this would trigger the cross-default provision under the DNC 11.75% notes as a payment default under debt guaranteed by a restricted subsidiary of DNC.

Independently, a bankruptcy filing by EchoStar topco could also trigger an event of default at DNC, assuming that the AWS-3-related entities, as secured guarantors of the topco spectrum secured notes, also would need to file for bankruptcy protection.

Under DNC’s 11.75% 600 MHz-backed secured notes and its stub convertible notes, it would be an event of default if a “Significant Subsidiary” of DNC commences a voluntary bankruptcy case. Octus assumes that the AWS-3-related entities would fit the definition of a significant subsidiary, which is defined under Rule 1-02(w) of Regulation S-X of the Securities Act of 1933. On the basis of our understanding that the entities holding the AWS-3 licenses remain subsidiaries of DNC, we expect that a bankruptcy filing by these entities would be an event of default under DNC’s notes, leading to acceleration of those notes and a bankruptcy filing by DNC.

In turn, the commencement of a voluntary bankruptcy at DNC would trigger an event of default under each of the DBS notes indentures.

Regarding the Hughes Satellite Services Corp. debt, the indentures for both of its notes include as an event of default a voluntary bankruptcy filing by the EchoStar Corp. topco.

AWS-3 Spectrum Re-Auction Complexity Might Limit Ability to Move Secured Guarantors

Although DNC’s existing debt documents do not restrict the company from moving the AWS-3 licenses out of the DNC box, the AWS-3-related guarantors have a complicated regulatory history, potentially affecting EchoStar’s ability to move the licenses and related entities.

Under the FCC’s auction of the AWS-3 licenses in 2015, EchoStar’s subsidiaries unsuccessfully sought to obtain very small business bidding credits of 25%. After the auction, the FCC denied DNC’s eligibility for the credits and the company relinquished licenses representing 25% of its gross purchase price in the auction, or $3.4 billion. In February of this year, the FCC began a rulemaking process for the re-auction of the relinquished AWS-3 licenses at a yet-to-be-determined date. This process is discussed in greater detail HERE.

In 2015, EchoStar’s AWS-3-related entities, Northstar Wireless and SNR Wireless, made interim combined aggregate payments of $516 million, or 15% of the gross winning bids, as a penalty to the FCC for each of its respective relinquished licenses. These interim payments are to be credited against any future payments owed.

Following a re-auction of the relinquished licenses, final default payments to the FCC will come due. The final default payments are composed of two components dependant upon the winning bid at the re-auction, with a credit against the payment provided by the FCC for any interim payments made previously:
 

• If a winning bid in a re-auction is less than the defaulted bid, the lesser of:
  • The difference between net, or cash, defaulted bid and the subsequent net winning bid; or
  • The difference between the gross defaulted bid and the subsequent gross winning bid.
     

• A payment equal to 15% of the lesser of the initial gross winning bid or the re-auction winning bid.
   

Therefore, in total, EchoStar’s aggregate maximum final default payment would be $2.9 billion following a re-auction, which is net of the interim payments mentioned above. However, we anticipate a re-auction will generate much interest across market participants, including EchoStar, mitigating the potential default payments EchoStar may ultimately owe.

Notably, DNC provided guarantees to the FCC for both Northstar Wireless and SNR Wireless’ future default-related payments and structurally benefits from its indirect ownership of the AWS-3 licenses.

It is unclear if these circumstances preclude the company from transferring the licenses to EchoStar topco, but it is noteworthy that the licenses have remained at the DNC credit box amid the company’s movement of various licenses starting in January 2024 and even now as the licenses serve as collateral under the EchoStar topco spectrum secured notes.

After Q1 Intercompany Loan Collateral Replacement, CBRS, 12 GHz, Certain 3.45 GHz Spectrum Remains Unencumbered

In EchoStar’s first-quarter 10-Q, the company disclosed that it exercised its “right to exchange” certain 3.45 GHz licenses serving as collateral for its intercompany loans payable to DISH DBS Corp. and EchoStar topco subsidiary EchoStar Intercompany Receivable Co. LLC for “certain other previously unencumbered wireless spectrum licenses of equal or greater value based upon the most recent third-party valuation.”

According to Colorado state records, on April 15, EchoStar uploaded a UCC-3 collateral amendment removing 65 3.45 GHz spectrum licenses from the collateral pool supporting the DNC intercompany loans. The company replaced these 3.45 GHz licenses with the following collateral:
 

• 167 700 MHz spectrum licenses at Manifest Wireless LLC;
   
• 36 28 GHz and four local multipoint distribution service, or LMDS, spectrum licenses at Alta Wireless Inc.;
   
• 22 24 GHz and 49 28 GHz spectrum licenses at Crestone Wireless LLC;
   
• One C-band spectrum license for the Cheyenne, Wyo., market at Little Bear Wireless LLC; and
   
• 20 37 GHz, 22 39 GHz and 2,585 47 GHz spectrum licenses at Window Wireless LLC.
   

FCC filings show that EchoStar subsidiary Castle Wireless LLC holds 59 licenses, which, according to our analysis, represent approximately 1.3 billion MHz-POP of the now unencumbered 3.45 GHz spectrum licenses.

Subsidiary Weminuche assigned the remaining six licenses, representing approximately 169 million MHz-POP of unencumbered 3.45 GHz licenses to Grizzly Wireless LLC on March 21. In April, Grizzly entered into a purchase agreement under which it agreed to assign the licenses to Omega Wireless LLC in exchange for 119 600 MHz spectrum licenses representing approximately 567 million MHz-POP, largely located in non-urban markets.
 

For context, EchoStar paid approximately $6.2 billion for its 600 MHz spectrum license portfolio at auction in 2017, and an independent appraisal in connection with DNC’s 11.75% secured notes issuance valued the licenses at $10.044 billion, an approximately 62% premium to cost. Based on the licenses underlying the Omega deal’s approximately $132 million gross cost basis, a similar premium would imply a $213 million value for the licenses. We expect that Grizzly’s approximately $130 million in cost-basis 3.45 GHz spectrum licenses have also appreciated. It is unclear if a cash component is included in the transaction.

Separately, in a smaller transaction, Grizzly entered into a purchase agreement with Kennebec Telephone Co. to acquire nine 600 MHz spectrum licenses located in South Dakota markets representing approximately 13 million MHz-POP.
 

EchoStar March 31 Pro Forma Capital Structure

EchoStar’s capital structure as of March 31, with pro forma adjustments to reflect its May 8 issuance of $150 million 10.75% spectrum secured notes, is shown below.