Loss in Arbitration Gambit Leaves Globalstar on Thin Ice

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PARIS — Globalstar’s attempt to force manufacturer Thales Alenia Space to build more satellites at favorable prices appears to have backfired, putting the mobile satellite services provider in danger of filing for Chapter 11 bankruptcy protection, according to officials with the two companies.

In what appears to be a classic example of unintended consequences, Covington, La.-based Globalstar not only lost its bid to have the American Arbitration Association order Thales Alenia Space to respect a contract that the manufacturer and the arbitrators agreed was no longer valid, but the panel also ordered Globalstar to pay Cannes, France-based Thales Alenia Space 53 million euros ($66 million) in contract termination fees. Globalstar’s nonpayment prompted Thales Alenia Space to notify Coface, the French export-credit agency, that a continued refusal to pay would put Globalstar in default of its Coface-backed bank loan.

The May 23 Coface notification started a 30-day countdown. If the two companies do not reach a settlement in that time, Thales Alenia Space will have the right to stop work on six nearly finished satellites that are scheduled for launch by mid-October.

In a June 11 filing to the U.S. Securities and Exchange Commission (SEC), Globalstar said it would seek to reverse the arbitration award and that it is continuing to negotiate with its contractor to find “mutually agreeable solutions” to the current contract impasse.

In a June 13 interview, Emmanuel Grave, Thales Alenia Space executive vice president for telecommunications programs, said his company is determined to find a way forward with Globalstar that allows the launch of the satellites in final assembly and the construction of six new spacecraft.

Grave said his company’s interests are fully aligned with Globalstar’s, especially given Coface’s importance to Thales Alenia Space’s ability to compete in the global telecommunications satellite market.

Globalstar originally planned a production run of 48 next-generation satellites, but ultimately settled with Thales Alenia Space on an initial 24-satellite program. Under the terms of the Coface-backed contract, a second batch of 24 satellites would be built once Globalstar had proved its business plan to Coface and the bank consortium.

Globalstar and Thales Alenia Space in recent months have concluded that Globalstar’s voice and data business can succeed with just 30 satellites in orbit. Grave said his company’s engineers have conducted their own analysis and informed Coface that only six more satellites are needed beyond the 24 already ordered.

Under the terms of its agreement with Globalstar and with Coface, Thales Alenia Space was duty-bound to notify Coface of the arbitrators’ award, and of Globalstar’s nonpayment.

“It is absolutely clear that the success of Globalstar is in our own interest,” Grave said. “Obviously we had to await the decision of the arbitration board after Globalstar’s decision to seek arbitration. We are hopeful that a way forward can be found so that we produce these six new satellites.”

The last six of the 24 second-generation satellites are in final assembly at Thales Alenia Space’s Rome facility and on track to be shipped to their launch pad — at the Russian-run Baikonur Cosmodrome in Kazakhstan — in August.

Grave declined to discuss what would happen to these six satellites if Globalstar is unable to pay the 53 million-euro fee ordered by the arbitrators.

Thales Alenia Space’s claim for payment was made to the U.S. District Court for the Southern District of New York. The satellite builder has agreed to give Globalstar until July 16 to respond to the demand for payment.

It remains unclear whether the 30-day Coface deadline will be extended given the agreement on the July 16 hearing in the New York district court.

In its June 11 statement to the SEC, Globalstar said a finding of default by Coface could force the company “to consider strategic alternatives, including … seeking protection under Chapter 11 of the U.S. Bankruptcy Code.”

Coface has been perhaps the world’s most active export-credit agency in backing satellite projects that feature heavy French industry participation. Thales Alenia Space and its fellow French satellite manufacturer, Astrium Satellites, are two of the world’s top commercial satellite builders. Both use the promise of low-cost Coface-backed financing to win orders. Coface also backs launch services provider Arianespace of France for the sale of commercial launch services.

Industry officials are divided on the effect a Globalstar bankruptcy would have on the global export-credit agency market for satellite projects in general, and on Coface’s participation in that market in particular.

Globalstar in early 2011 asked Thales Alenia Space to begin work on some portion of the second batch of satellites under terms that the manufacturer said were no longer valid because of previous Globalstar delays in deciding when and how many satellites to order, and its delays in establishing an agreed-to escrow account for the work.

In its May 4 decision, the three-judge arbitration panel said its jurisdiction did not extend to Globalstar’s other threatened legal action against Thales Alenia Space for contract delays, disclosures about the manufacturer’s problems following an April 2009 earthquake at its L’Aquila, Italy, satellite component plant, and product warranty liability.

Globalstar did not disclose how it would attempt to overturn the arbitration award. In the 2009 amended Globalstar satellite production contract, which Thales Alenia Space included in its court filing, the two companies agreed that any ruling by the American Arbitration Association “shall be final and binding.”