Term lenders to Telesat Canada have launched a legal challenge to the Canadian satellite company’s recent transfer of Telesat Lightspeed equity, characterizing the asset shift as a “financial shell game” that both violates the loans’ credit agreement and constitutes fraudulent conveyance.

Wilmington Savings Fund Society, the administrative agent to the company’s term loans filed the complaint on behalf of lenders before the New York County Supreme Court on 21 January in a much-anticipated rebuke of the company’s decision to transfer 62% equity in its Telesat Lightspeed business into a non-guarantor subsidiary. The move, the complaint alleges, has positioned value tied to the company’s low earth orbit satellite buildout outside the creditors’ reach while the legacy geostationary satellite business is insolvent.

The agent launched a concurrent suit in Ontario’s Superior Court of Justice hours later the same day, as reported. (The docket can be found here)

“[C]reditors have proactively sought for years to engage with the Company to find a consensual solution to this foreseeable crisis,” WSFS states. “But rather than engage, the Company ignored its debtholders and audaciously attempted to transfer its crown jewel asset out of its creditors’ reach, in clear violation of its contractual obligations and applicable law.”

WSFS succeeded JPMorgan Chase Bank as the administrative agent on 6 January after the latter resigned, according to the complaint.

The lenders make the case that the buildout of the LEO business will be crucial for the company’s survival and future value as its GEO business continues to decline amidst falling revenue, EBITDA and cash flows.

“Although [LEO] does not yet have cash flows, and those future cash flows are as yet uncertain, it is already significantly more valuable than the GEO business,” the complaint states. In fact, the complaint proposes that the LEO business is the “sole source” of the Telesat’s equity value.

It is in this context — alongside the fact that the company has $1.7bn in debt coming due in December 2026 lenders say “it has no way to pay” — that the transfer was made, the suit alleges, leaving term lenders “with claims against a hollowed out and even more insolvent obligor, now comprised predominantly of the deteriorating GEO business.”

The lawsuit’s claims were made on behalf of term loan lenders holding 90% of the term loan, according to a source. The plaintiffs are represented by Paul Weiss. 9fin previously reported that a group of Telesat’s secured lenders were being advised by that firm in addition to Evercore, and Lincoln International, while PJT Partners and Kirkland & Ellis are said to be representing the company.

Telesat’s stock closed at $27.39 a share on 21 January, down nearly 21% from close on 20 January.

We took a deeper look at the lenders’ claims.