Iridium: High Yield Debt

Topics: Debt, Loan, Bonds Pages: 6 (1030 words) Published: September 19, 2014


1) Calculate Iridium’s intrinsic value. (Excel sheet) Note that the method is CCF instead of DCF. Study the two methods and know the difference. Use Risk Premium of 7.5%. Compare with market value and analysts estimate. Kindly refer excel sheet

2) Why did Iridium fail – Strategic reasons

The strategic reasons for the failure of Iridium are the following:

All the above strategic reasons contributed significantly towards the failure of Iridium.

3) Why did Iridium Fail – Financial Reasons. Each group should note the advantages and disadvantages of Bank Debt and Senior notes. Advantages of Bank debt
Bank loans money to the business on the basis of the business and its capacity to service the debt by making timely payments. Banks do not take any ownership position in the company. Bank never gets involved in any aspect of running a business to which a bank grants a loan. Once the loan is paid off then there is no relation or involvement with the Bank. The interest on the Bank loans is tax deductible.

Disadvantages of bank debt
Bank loans are difficult to obtain unless company has a good track record and or valuable collateral. Banks will mostly lend to the businesses which has capacity to repay it. Borrowers can be required to provide personal guarantees which in case of non -payment can be seized. Interest rates for the Business loan can be quite high and Borrowers need to service the debt by making timely payments which in case of non-payment can have several repercussions.

Advantages of Senior Note
Senior notes carry relatively low interest rates.
Senior debt is relatively easy to raise as compare to normal debt. Disadvantages
In the event the issuer goes bankrupt, senior debt must be repaid before other creditors receive any payment. It is mostly backed by collateral and usually it covers most assets of the organization

Following are the financial reasons for the failure of Iridium

Iridium's target customers consisted primarily of traveling professionals, corporate executives, government employees, and rural users in both developed and developing market. Analysts regularly cited the figure of 1% of the global cellular market as the likely initial customer base of satellite phone users but no one knew the exact origin of this figure and all the future revenues were calculated basis this figure. So, future revenues were calculated on the figure which no one is aware of and it might have led to the wrong valuation of the company. Using similar analysis, Wall Street analysts made prediction about Iridium's future revenues and cash flows.

Based on Investor demand for the equity and general interest in the project, iridium Banker's thought it could raise 60% of the total cost in the debt.

With money running out and a failed public offering behind it, management decided to raise debt from the strategic partners instead of public markets.

Due to success of IPO issued $800 million of high yield debt with Senior A & senior B notes which were semi-annual, cash pay Bonds with an 8 year maturity instead of low yield other debts. They also came up with third series of senior notes with a coupon of 11.25%, a spread of 400bps over Aaa rated bonds which were costly.

Iridium established a 2 year senior secured line of credit with a syndicate of Banks in December 1997. Iridium also signed a new $800 million secured credit facility. With huge Bank loans and lower than expected cash flows, Iridium was not able to service their debt after getting extensions also.

Initially Handset cost and cost per minute was also high for Iridium. All the above factors contributed towards the failure of Iridium.

4) Comment on Amount of debt, type of debt and sequence of raising debt. Link it to capital structure theories and write a critique. The Capital Structure Theory is threefold:
1- Peking Order Theory
Prioritize the sources of financing in the following order:
Internal finance Debt Equity...
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