Tensions between Charlie Ergen’s telecom empire and debtholders at DISH and EchoStar have been simmering since earlier this year, when the company shifted valuable assets and contracts out of the creditors’ reach and into new unrestricted entities. Ergen now is attempting to convince — coercively or not — creditors riled by his bold negotiation tactics to get on board with the sweeping debt maneuvers in order to pull off the proposed merger of DISH DBS with DIRECTV.

During a call on 1 October, crossholder group advisors Lazard and Milbank said the company’s proposal falls substantially short of an executable deal, citing the economics of the exchange offer, sources said. The advisors are also focused on ways to tighten covenants of the DIRECTV bond indentures to ensure that the merged entity would pay down debt, and to have guardrails to prevent more value being transferred away from the creditors should the merger falls through.

Crossholders will likely push for sweeter terms, such as asking EchoStar to provide more value to the new notes (by way of a stake in the wireless/spectrum business), or have TPG Capital/DIRECTV increase its offer for the acquisition of DISH DBS, sources said. TPG is set to become the new owner of DIRECTV.

Moreover, the deal announced 30 September did not stave off litigation risks given it would imply more than $3bn of value being transferred from creditors, sources said. Until closing, EchoStar is allowed to transfer out up to $1.52bn of value — expected to be cash flows from the pay TV business — while the parties await regulatory approval, and it can capture at least $1.568bn of discount from the exchange of new DISH DBS notes into new DIRECTV notes.

Crash landing on you

EchoStar announced that it had entered into an agreement for DIRECTV to buy DISH DBS Corporation, the operator of the EchoStar/DISH pay-TV business, including DISH TV and Sling TV, for $1 plus the assumption of DISH DBS’s roughly $9.75bn in net debt.

In conjunction with the acquisition, the company announced a series of new money raises, debt exchanges and internal reorganizations, which the company expects will collectively result in a $7bn reduction in consolidated debt, add $5.5bn of new capital and generate a two to three-year runway.

The complexity of this M&A and financing deal was captured by EchoStar CEO Hamid Akhavan’s soundbite on yesterday’s call discussing the deal: It’s akin to “landing two or three 747s on the same runway at the same time without crashing.”

To fund the acquisition and address maturities beyond 2024, DISH DBS has launched exchange offers at par for $9.75bn of debt to exchange into new, nearly like-for-like debt, but with unsecured notes to also receive a second lien on assets. DISH DBS is also seeking the consent of holders of each series of notes to pave the way for the acquisition and the reorganizations or other similar transactions to occur.

Consent is also being sought from holders of the existing senior secured notes due 2026 and 2028 to allow amendments to the terms of the intercompany loan provided by DISH DBS to DISH Network to provide that the consent rights under the intercompany loan would accrue only to the benefit of the new DISH DBS secured notes due 2026 and 2028. This would help eliminate intercompany receivables and free up EchoStar’s 3.45-3.55 GHz spectrum.

The exchange offers expire on 29 October 2024 and are conditioned on at least two-thirds in principal amount of each series of notes being tendered. Also, the provision allowing a mandatory exchange of new DISH DBS notes into new DIRECTV notes will only be included in the new DISH DBS notes’ indentures if the above minimum percentage threshold is reached and enough existing DISH DBS notes are tendered such that discount capture of at least $1.568bn will be achieved from the exchange of new DISH DBS notes into new DIRECTV notes.

“Ergen is selling equity for $1. In order to arrive at that dollar price, he needs to capture roughly $1.6bn of discount through the proposed exchange. That means the entity is worth negative nearly $1.6bn,” one of the sources said.

Bondholders could be better incentivized to take a haircut in exchange for some claim on the 5G network, which convertible holders have a claim on, a portfolio manager tracking the situation said. But this might be a carrot that Ergen is unwilling to dangle, because even by allowing the merger to take place with the haircut, ”lenders are still in a better place at the end of the day than they currently are,” the manager said.

The company has already executed a transaction support agreement with certain holders of DISH Network’s $1.96bn of 0% convertible notes due 2025 and $2.91bn of 3.375% convertible notes due 2026. These holders include two groups — holders weighted in the convertible notes due 2025 advised by Paul Weiss and Centerview, and holders weighted in the convertible notes due 2026 advised by Akin Gump and Perella Weinberg Partners — that signed separate co-ops. Supporting holders represent over 85% of the aggregate amount of convertible notes due 2025 and 2026 outstanding.

New money issues

Another prong of the transaction has been completed. DISH DBS is set to receive $2.5bn of standalone financing from DIRECTV, funds managed or advised by TPG Angelo Gordon and Centerbridge, and Jefferies. Proceeds will largely be used to redeem the $1.99bn DISH DBS senior notes due in November 2024, while $500m is also earmarked for general corporate purposes.

However, some crossholders took issue with the assets backing the new financing, given they are subject to an ongoing lawsuit stemming from a series of transactions after EchoStar merged with DISH Network. They are also concerned about a hunter-gatherer provision under the proposed new loans, which would allow certain holders to buy debt in the secondary market and roll it up at a premium into the same facility, making them structurally senior while getting higher fees and coupons, sources said.

About two weeks ago, the crossholder group had offered to provide $2.5bn of new money backed by spectrum licenses, sources said. That funding didn’t have exit fees and had similar coupons and upfront fees to the current proposal, they said.

EchoStar turned down that proposal, compounding crossholders’ angst, sources said. The crossholder group filed the ongoing lawsuit in April, claiming that “a brazen series of related transactions” undertaken in January involving “billions of dollars of assets” breached their indentures and constitute actual and/or constructive fraudulent transfers.

DISH Network’s senior secured notes due 2027 and DISH DBS’ senior secured notes due 2026 and 2028 have largely held steady today. However, the DISH DBS senior notes due 2026 are currently indicated at 87.4 cents, down from 90.1 on 27 September. Quotes on the senior notes due 2028 are at 76.8 cents, down from 79.6 cents over the same period; and the senior notes due 2029 are indicated at 68.6 cents, down from 70.3 cents — likely a consequence of the significant discounts holders will have to stomach on the eventual exchange into DIRECTV notes.

Quotes on EchoStar subsidiary Hughes Network Systems’ senior secured notes due 2026 are at 92.6, up from 90.3 on 27 September.

DISH, Houlihan Lokey and Lazard declined to comment. Milbank didn’t respond to requests for comment.

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