Article/Intelligence
EchoStar’s Topco Spectrum Secured Notes Likely Enable Creation of Value-Unlocking D2D Spectrum JV Leveraging the Company’s Scarce S-Band Assets
- Amid the increasing public visibility of the emerging direct-to-device, or D2D, market, Octus believes that it could be an opportune time for EchoStar to pursue a mobile satellite service, or MSS, spectrum partnership leveraging its globally harmonized international S-band licenses. With only three D2D-ideal globally harmonized paired lower mid-band MSS bands that are increasingly accounted for, and multiple well-funded parties interested in the space, EchoStar’s licenses, should they come to market, are likely to attract multiple bidders in today’s environment.
- Although EchoStar’s AWS-4 licenses, which authorize both U.S. terrestrial and MSS S-band spectrum use, currently serve as collateral under its $9.55 billion in EchoStar Corp. topco spectrum secured notes, the indentures governing these notes allow the company, under certain conditions, to sell such licenses to a “Spectrum Joint Venture.” We believe this could facilitate the company’s entry into a partnership with one or more partners to further develop and utilize its global S-band MSS rights.
- Potential partners in an MSS joint venture include SpaceX, Amazon’s Project Kuiper Apple and/or Globalstar.
Source: Yahoo! Finance, Octus analysis
The day after T-Mobile’s Starlink SuperBowl commercial, on Feb. 10, MDA Space announced its agreement to an approximately $769 million contract with Globalstar to manufacture “more than 50” next-generation low-Earth orbit, or LEO, satellites. This order arrives as Globalstar plans to continually expand its D2D-related partnership with Apple, which leverages Globalstar’s global Big LEO MSS spectrum rights.
Apple, a first mover in the space, began offering satellite-enabled D2D services to iPhone users through Globalstar’s constellation in November 2022. SpaceX’s launch of 17 new Globalstar satellites in an April-to-September window is expected to bolster these services. While the parties’ disclosure of specific capabilities is limited, Globalstar’s service to Apple and its customers is expected to expand further under a $1.5 billion extended MSS network that is planned to provide users with “access to much-improved in-building and in-vehicle connectivity with less dependency on antenna orientation.”
Meanwhile, in our opinion, EchoStar holds what may be the most valuable global spectrum “real estate” for D2D services with its portfolio of S-band MSS rights. Although EchoStar CEO Hamid Akhavan previously stated his expectation that the company would work with partners to develop this spectrum, no partner has yet been announced.
As Octus has emphasized, we believe that three globally harmonized MSS bands represent the most viable resources to deliver D2D services, with EchoStar’s portfolio potentially best positioned. With Apple actively developing the Big LEO MSS band and AST SpaceMobile pursuing a transaction for Ligado’s L-band MSS licenses, EchoStar’s combined global S-band MSS licenses, as illustrated below, represent a scarce asset that we believe is likely to attract multiple well-funded bidders in today’s environment.
(Click HERE to enlarge.)
Although EchoStar’s terrestrial AWS-4 licenses, which authorize both U.S. terrestrial and MSS S-band spectrum use, serve as collateral under its $9.55 billion in EchoStar Corp. spectrum secured notes, the indentures governing these notes allow the company, under certain conditions, to sell such licenses to a “Spectrum Joint Venture.” We believe that this could facilitate the company’s entry into a partnership with one or more partners to further develop and utilize EchoStar’s global S-band MSS rights.
Amid the increasing public visibility of the emerging D2D market, we believe it could be an opportune time for EchoStar to pursue such a partnership. In our view, a confluence of factors provide a rationale for a near-term deal involving EchoStar’s rights, including:
- SpaceX’s deployment of a more than 460 satellite Starlink direct-to-cell constellation, which currently provides beta test service and is set to launch commercial operations in July. Given the limited satellite orbital life of the Starlink constellation – potentially less than five years – we believe that it could be incentivized to optimize its satellites’ spectrum by combining it with EchoStar’s advantaged global S-band holdings.
- As Octus has highlighted, new Federal Communication Commission Chairman Brendan Carr is clear in his intentions to put further spectrum to use in the commercial sector on an aggressive timeline. This may lead him to facilitate an EchoStar deal that more quickly puts the rights to expanded use.
- To the extent that Apple pursues a transaction with EchoStar, it would be advantageous for it to expedite access to the S-band spectrum as Globalstar launches its replacement satellites and extended MSS network.
- As EchoStar positions itself to renew its EU S-band licenses expiring in 2027, a partnership or transaction putting the licenses to further use would likely bolster a renewal.
In line with our previous views, we believe that the most logical partners in an S-band MSS tie-up with EchoStar include:
- SpaceX: The company relies on terrestrial spectrum from global mobile network operators, which, in our opinion, presents a more challenging business model than using globally harmonized MSS spectrum. Given that Starlink’s direct-to-cell satellites utilize T-Mobile’s upper PCS G-block, which is directly adjacent to EchoStar’s combined upper H-block and AWS-4 licenses, we expect that EchoStar’s S-band MSS spectrum potentially functions in SpaceX’s direct-to-cell satellites, and a partnership would solve for potential out-of-band emission concerns.
- Amazon’s Project Kuiper: As previously discussed, Project Kuiper is not expected to include D2D capabilities in its first generation of satellites, but Amazon could pursue a wider-ranging offering if it had access to EchoStar’s 5G network, which may be of interest.
- Apple/Globalstar: Globalstar has a meaningful transaction history with EchoStar. An Apple-EchoStar partnership could leverage the ongoing investments in satellite constellations made under the Apple-Globalstar partnership. EchoStar could potentially enter a separate partnership with Apple or one with both Apple and Globalstar together utilizing the newly formed Globalstar Licensee LLC special purpose entity, or SPE, with 80% and 20% ownership splits between Globalstar and Apple, respectively. In addition to making the International Telecommunication Union filing associated with Globalstar’s extended MSS network, Apple-linked entity CCC Communication Holdings France also made a separate ITU filing for a non-geostationary orbit, or NGSO, constellation related to the S- and L-bands. Over time, a partnership with Apple might benefit from the inclusion of Project Kuiper and Jeff Bezos’ launch company Blue Origin, providing greater scale and vertical integration, respectively.
In our view, Globalstar’s operations and assets, including its band 53 spectrum and XCOM RAN technology, could provide meaningful rationale for a more wide-ranging EchoStar-Globalstar tie-up. However, due to a number of factors, we believe the companies are currently likely better suited for partnership opportunities than a merger.
In the event that an EchoStar S-band transaction includes combining EchoStar’s and Globalstar’s MSS licenses, we expect that SpaceX, in line with its Jan. 30 letter to the FCC advocating for an upper C-band sharing regime, would argue to regulators that such consolidation could harm “consumers, competition, and innovation.”
SATS Spectrum Secured Notes’ ‘Spectrum Joint Venture’ Construct Likely Paves Path for MSS Partnership
Given the yearslong investment and operational commitment that an S-band MSS partnership would entail, we believe that an S-band partner, such as Amazon, Apple, Globalstar and/or SpaceX, among others, would likely require that EchoStar colocate its various global S-band authorizations in a bankruptcy-remote credit silo. Such a partnership could generate revenue through the licensing of its spectrum rights to the joint venture partners and/or other third parties.
Under the Apple-Globalstar partnership, to secure any claims arising under its terms agreement, Globalstar granted Apple a first lien on all of the company’s “assets that are used or may be needed or useful.” Additionally, with the completion of the amended terms agreement in November 2024, Apple is the sole provider of funded debt to Globalstar.
To execute an international MSS spectrum partnership, including EchoStar’s U.S. MSS licenses, we believe that EchoStar could, in a bankruptcy-remote silo, colocate the company’s:
- International S-band rights;
- 5 MHz upper band under its U.S. H-block licenses; and
- A certain portion of its band 70 U.S. AWS-4 spectrum licenses, perhaps 5-10 MHz, which are directly adjacent to the upper H-block licenses.
EchoStar’s international S-band licenses are unencumbered. However, its U.S. S-band MSS licenses serve as collateral for topco EchoStar Corp.’s $9.55 billion of secured debt under three series of spectrum secured notes issued in November 2024, complicating its ability to contribute such licenses to a bankruptcy-remote silo and/or joint venture.
Importantly, EchoStar’s U.S. H-block licenses (1915-1920 MHz UL; 1995-2000 MHz DL) are unencumbered. As shown above, the upper block of the H-block licenses overlaps with the frequencies of EchoStar’s EU S-band and International Telecommunication Union global non-geostationary orbit rights. Although these are not MSS licenses in the U.S., the H-block licenses are:
- Among the bands included in the FCC’s Supplemental Coverage from Space order;
- Across the continental U.S.; and
- Directly adjacent to the lower block of EchoStar’s AWS-4 spectrum.
Under the indentures for EchoStar’s topco spectrum secured notes, the company is permitted to sell spectrum collateral backing the notes to a “Spectrum Joint Venture” for cash in an amount of at least their appraised fair market value. Such sales require pro forma compliance with a 37.5% first lien loan-to-value, or LTV, ratio and are capped in aggregate at $9.5 billion of appraised value, together with other permitted sales of spectrum collateral to nonaffiliates. If AWS-4 spectrum is sold to the joint venture, EchoStar is required to apply 37.5% of the net proceeds to redeem, in any combination, its:
- 6.75% spectrum secured exchange notes at par; or
- 10.75% spectrum secured notes in the following order:
- First, up to $1.5 billion in principal amount at 103%;
- Second, up to $500 million in principal amount at 105%; and
- Third, amounts exceeding $2 billion at: (1) through Nov. 11, 2026 – par plus 60% of the make-whole premium under the 10.75% notes; and (2) on and after Nov. 12, 2026 – the applicable redemption price under the 10.75% notes.
The indentures for EchoStar Corp.’s spectrum secured notes define a “Spectrum Joint Venture” as a “bona fide joint venture between [EchoStar Corp.] and/or the Guarantors with an unaffiliated third party; provided however that [Chairman Charlie Ergen], any Related Party and any employees or management of [EchoStar] or any of its Subsidiaries shall not hold any direct or indirect Equity Interest in such Spectrum Joint Venture other than indirectly through their ownership of Equity Interests of the Company.”
The new spectrum secured notes indentures suggest that noteholders underwrote the securities at an approximately $35 billion aggregate valuation for EchoStar’s AWS-3 and AWS-4 spectrum licenses backing the notes. The notes allow EchoStar to raise additional pari secured debt in pro forma compliance with a 37.5% loan to value, or LTV, ratio, capped at $13 billion for the first two years after issuance (thereafter, the cap can increase to $15 billion, subject to the LTV ratio condition). Applying the 37.5% LTV ratio, the current $13 billion pari debt cap drives a suggested valuation of $35 billion.
The AWS-3 and AWS-4 spectrum licenses serving as collateral for the notes include both 3GPP band 66 and band 70 spectrum. Since band 66 is deployed in the radios of AT&T, T-Mobile and Verizon, limiting the network buildout costs for such spectrum, and band 70 is only deployed in EchoStar’s 5G network, we ascribe the bulk of the approximately $35 billion of implied aggregate AWS-3 and AWS-4 spectrum value to the band 66 licenses. Therefore, if EchoStar were to contribute band 70 spectrum to an MSS joint venture, it would require a lower paydown of the company’s debt than for band 66 spectrum.
To the extent it is technically feasible, since EchoStar could be a common network operator of both the MSS satellite constellation and U.S. terrestrial 5G network using its S-band licenses, it might be possible for EchoStar to provide access to certain MSS capacity from its AWS-4 spectrum that serves as collateral for the notes to a joint venture or its partner(s) while still using the same frequencies on a terrestrial basis. Similarly, the joint venture might be able to provide certain terrestrial capacity from its bands back to EchoStar.
Over time, and to the extent that the D2D space further matures and the business case justifies the transfer, we believe EchoStar could potentially sell additional band 70 spectrum licenses to the MSS joint venture under the indentures’ “Spectrum Joint Venture” provisions.
An illustrative example of the mechanics of a hypothetical EchoStar international S-band MSS joint venture, including estimated minimum cash proceeds to satisfy spectrum secured notes’ asset sale provisions and required debt paydowns, is shown below. While each spectrum license certainly has stand-alone value, we believe that keeping these collective global rights together is value accretive, as the combined rights are worth more than the sum of the individual licenses’ value.
In the above example, similar to the Apple-Globalstar partnership, EchoStar would sell a certain portion of the MSS joint venture to a third-party partner(s) and potentially receive advanced funding payments from customer(s), which would be used, at least in part, to fund the paydown of topco spectrum secured notes as required following a permitted sale of the currently encumbered AWS-4 spectrum licenses.
Under the Apple-Globalstar extended MSS network SPE partnership, Apple agreed to purchase a 20% equity interest in the partnership from Globalstar for $400 million, implying a $2 billion valuation for the SPE. The SPE will hold:
- A “new satellite constellation”;
- “[E]xpanded ground infrastructure”; and
- “[I]ncreased global MSS licensing.”
Additionally, based on Globalstar’s guidance and historical performance, we estimate that services provided to Apple plus the 15% of network capacity that Globalstar will retain in its expanded constellation will drive more than $350 million of annualized revenue in the first full year of the extended MSS network’s operation.
Globalstar’s simplified corporate structure is shown below:
Although our illustrative EchoStar scenario above contemplates the company contributing only 10 MHz of U.S. spectrum to the joint venture compared with the 24.275 MHz (7.775 MHz UL / 16.5 MHz DL) of U.S. MSS spectrum covered by Globalstar and Apple’s joint venture, EchoStar’s rest of the world licenses generally provide a wider bandwidth than those of Globalstar. To the extent feasible as a single satellite-terrestrial network operator, the joint venture might have access to additional MSS capacity from EchoStar’s collateralized licenses.
Further, based on a white paper published by expert valuation consulting firm Summit Ridge Group and expert MSS and LEO satellite consulting firm TMF Associates on Jan. 27, which was supported by Globalstar, EchoStar’s S-band MSS spectrum licenses allow for relatively higher power levels and face less out-of-band emission restrictions compared with Globalstar’s Big LEO MSS spectrum, potentially mitigating the relatively narrower U.S. bandwidth to a certain degree.
EchoStar’s 5G network currently uses both its upper H-block and AWS-4 spectrum in the U.S. for downlink purposes. To the extent it is permitted to do so by the FCC and is technically feasible, an EchoStar MSS joint venture could potentially repurpose parts of this spectrum for downlink or time division duplex, or TDD, purposes, which would allow for both uplink and downlink service.
Additionally, EchoStar’s H-block and AWS-4 spectrum licenses are currently subject to its 5G network buildout commitments to the FCC. If certain of these licenses are focused on D2D services under an MSS spectrum partnership instead of terrestrial services, FCC and Department of Justice approval could be required.
In a joint venture, for further partner protection, EchoStar could provide partners with a right of first refusal for their equity interests in the case of a hypothetical EchoStar bankruptcy filing.
Apple Partnership Required Refi of Globalstar 2L Loan Held by EchoStar, Potentially Foretold Future Strategic Opportunities
EchoStar and Globalstar’s shared pursuit of mobile satellite connectivity likely drove a previous transaction. In November 2019, Globalstar entered into a $199 million 13.5% PIK second lien term loan facility with EchoStar affiliate Inverness Financing LLC, Globalstar Executive Chairman Jay Monroe’s Thermo Cos. and certain other unaffiliated lenders. Under this agreement, EchoStar and Thermo each provided $95.1 million in commitments.
Additionally, as further consideration, Globalstar provided the lenders with warrants to purchase up to 7% of the company’s outstanding common stock on a fully diluted basis, or up to approximately 3.35% for EchoStar’s share of warrants. These warrants were fully exercised as of March 30, 2021.
Shortly after Globalstar closed the facility, in February 2020, it entered into an agreement with Apple under which Apple paid Globalstar for “non-recurring engineering (NRE) services” to explore the “potential development and operation” of services with Globalstar’s “assets and capacity.”
As a means to remove Thermo and EchoStar’s encumbrances on the Globalstar assets, Apple’s September 2022 partnership agreement with Globalstar required Thermo to convert its second lien loans into subordinated preferred or common equity, while non-Thermo second lien loans, including EchoStar’s, were refinanced or converted on terms that were “no less favorable” to Globalstar than the Thermo conversion. In March 2023, Globalstar refinanced the EchoStar second lien loans with the issuance of $200 million in principal amount of 13% senior unsecured notes due 2029.
Preceding EchoStar’s Globalstar second lien loan investment, the company’s pursuit of MSS spectrum dated back to its 2012 acquisitions of DBSD North America Inc., fka ICO North America Inc., and reorganized TerreStar Networks Inc. Just prior to the Globalstar second lien loan investment, in October 2019, EchoStar acquired ITU nongeostationary “global spectrum rights for S-band mobile satellite services [MSS]” through its acquisition of Helios Wire Corp. and its Australian subsidiary, Sirion Global Pty. Ltd.
