Globalstar: Evaluating Bankruptcy Risk
Nov. 10, 2014 9:30 AM ET | 9 comments | About: Globalstar, Inc. (GSAT)
Disclosure: The author is short GSAT. (More...)
Summary
Globalstar currently sits under a large debt load of over $600 million even as it loses money every quarter.
The most recent quarter showed only $4 million of EBITDA, falling short of required targets in the credit facility.
However, bankruptcy risk can be mitigated by taking advantage of the large market cap to conduct a large financing.
Similar restructurings were completed in 2009 and 2013.
Evaluating the recent bankruptcy of GTAT is instructive in identifying the risks in Globalstar.
Shares of Globalstar (NYSEMKT:GSAT) have been on a roller coaster ride ever since Kerrisdale Capital presented a short thesis on the company in early October. The shares fell from just under $4.00 to as low as $1.56, before rebounding to the current level of around $2.60. Some of the recent rebound has been due to the release of quarterly earnings where Globalstar revealed a slight growth in subscribers and revenues, along with posting over $4 million in "adjusted EBITDA".
(click to enlarge)
A key point within the Kerrisdale thesis is that Globalstar will inevitably go bankrupt and hit a share price of true zero. I disagree with some points of the Kerrisdale thesis, but I do see that an analysis of the recent bankruptcy of GT Advanced Technologies (OTCPK:GTATQ) can shed some light on the risks that current holders of Globalstar are facing.
This becomes particularly relevant in light of Globalstar's recently released quarterly earnings. It is now clear that Globalstar is on track to once again fall short of its required EBITDA covenants as required in its loan facility. This is currently only being permitted by an ever growing equity "cure" provision.
The EBITDA requirements of the credit facility are also spelled out more succinctly in the 10Q. As shown, the EBITDA requirements are as follows:
Period Minimum Amount
1/1/14-6/30/14 $9.9 million
7/1/14-12/31/14 $14.1 million
1/1/15-6/30/15 $17.0 million
7/1/15-12/31/15 $23.5 million
The first problem becomes immediately apparent. In the first 6 month period (1/1/14-6/30/14), Globalstar generated around $6 million of EBITDA, falling short of the $9.9 million target by over $3 million. Only an equity "cure" contribution allowed Globalstar to avoid default. It is easy for investors to miss this because EBITDA is not explicitly broken out in the 10Q or 10K. It must be calculated.
The second problem is that the EBITDA requirement in the credit facility escalates over time, even as Globalstar's performance seems to be deteriorating. So while Globalstar was around 30% short on EBITDA in 1H 2014, the target for 2H 2014 is now more than 40% higher than that level. By the time we get to 2H 2015, the target is more than double what it was in the previous half.
Adjusted EBITDA for Globalstar (as disclosed on their conference call) was just over $4 million for the quarter. Yet the company needs to produce over $14 million for the combined period of Q3 and Q4. Based on the historical runs rates of around $3 million per quarter, this now looks highly unlikely.
If Globalstar can maintain a constant $4 million per quarter in EBITDA ($8 million per half year), then it will have earned a CUMULATIVE TOTAL of $32 million in EBITDA over the periods specified in the table above. Yet the amount required in just the 2nd half of 2015 alone is already nearly $24 million. Globalstar falls short by nearly an additional $32 million during this time.
Globalstar has already disclosed in its risk factors that:
An inability to comply with the financial and nonfinancial covenants contained in the Facility Agreement could have significant implications. Our Facility Agreement contains a number of financial and nonfinancial covenants. Our ability to comply with these covenants will depend on our future performance, which may be affected by events beyond our control. Our failure to comply with these covenants would represent an event of default. An event of default under the Facility Agreement would permit the lenders to accelerate the indebtedness under the Facility Agreement. That acceleration would permit holders of our obligations under other agreements that contain cross-acceleration provisions to accelerate that indebtedness.
So in short, Globalstar is already failing to meet the EBITDA targets specified in its credit facility. The only reason it has not been deemed in default is due to an equity "cure" contribution that was made. But as the targets get increasingly higher, it becomes harder and harder for Globalstar to continue raising new equity every 6 months in larger and larger sizes. A subsequent default on the credit facility therefore looks unavoidable at some point. This default then triggers cross acceleration on the company's other obligations. The biggest question mark is simply the timing of these events.
However, I do believe that in the short/medium term Globalstar will avoid a bankruptcy, but only by issuing large amounts of common stock and more convertible debt. It will also need to once again restructure its existing debt. This will likely push the share price to around $1.00, but could still avoid the specter of bankruptcy. This is largely what the company was able to do in 2008/2009, which pushed the share price at the time down to around 30 cents even though it avoided bankruptcy. A similar set of restructurings occurred in 2013, and again we saw a 30 cent share price. Globalstar had originally filed for bankruptcy in 2002, and emerged from the bankruptcy in 2004 as a result of the support from investor Thermo Capital Partners ("Thermo"). But the company has not actually filed for bankruptcy again since that time.
It is important to keep in mind that at a share price of $1.00, Globalstar would still have a market cap of nearly $900 million, which is still a lofty valuation.