Examiner’s Report Challenges Valuation of Loral

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In a development that could delay Loral’s exit from Chapter 11 bankruptcy protection — and create serious cash flow problems for the company’s satellite manufacturing unit — a court-appointed examiner’s report has concluded that Loral managers substantially understated the value of their business.

Loral had been planning to exit bankruptcy in May. How long that might be delayed as a result of the March 14 examiner’s report is unclear. The court could decide to use the examiner’s findings to re-evaluate Loral’s proposed reorganization, Loral officials said.

Loral Space and Communications Chairman Bernard L. Schwartz said in a March 18 interview that while there are no guarantees, he is optimistic that “even in a worst-case scenario, it would not extend [the process of exiting bankruptcy] by more than 60 days.”

For New York-based Loral, exiting bankruptcy reorganization — a process that started in July 2003 — has become vital, especially for its Space Systems/Loral satellite manufacturing subsidiary in Palo Alto, Calif.

In a March 15 filing with the U.S. Securities and Exchange Commission (SEC), Loral said its Space Systems/Loral satellite manufacturing unit is likely to run out of cash in August unless the company is clearly on its way out of bankruptcy by then.

The reason is that some potential Loral customers are refusing to sign contracts or place orders until Loral is out from under the Chapter 11 cloud. In addition, some of the contracts Loral recently won include clauses that allow customers to defer payments until the company is out of bankruptcy.

Space Systems/Loral has 1,300 employees and is able to cover its fixed costs only by generating sales of three or four satellite orders per year. Loral said in its SEC filing that after going two years without any new satellite contracts, Space Systems/Loral booked five satellite orders in 2004 and added another earlier this year. Nevertheless, the company stated in its SEC filing that Space Systems/Loral is running low on cash.

Space Systems/Loral also is waiting for a $250 million payment from insurance underwriters following the January 2004 failure of the solar arrays of the Estrela do Sul satellite to open fully. Schwartz said that insurance payment is being processed normally and there are no foreseen obstacles to the claim’s payment. He said that is likely to occur this summer.

The court-ordered examination of Loral’s current assets was conducted by Goldin Associates LLC, of New York, at the request of Loral’s equity shareholders. The equity shareholders will receive nothing under Loral’s current reorganization proposal, which if accepted by the court, will permit Space Systems/Loral to emerge from bankruptcy protection debt-free.

Loral has said its total current debt, plus leases and other obligations whose payment is due in 2005, is $1.67 billion. If the company’s estimated value is higher or if its total debt is lower, than Loral has calculated, the equity shareholders could stand a chance of being granted a share of the post-bankruptcy Loral.

In its examination, Goldin Associates concluded that Loral had undervalued itself by between $281 million and $463 million. Under these higher estimates, Loral’s value range would be between $931 million and $1.26 billion.

Goldin Associates took particular issue with three Loral estimates.

The first relates to Space Systems/Loral, which Goldin said is more valuable than Loral estimates. Loral managers assigned a negative value for Space Systems/Loral, whereas the Goldin examination concluded the satellite-manufacturing division is worth between $98 million and $173 million.

The second discrepancy, according to the Goldin report, is Loral’s Skynet satellite services business, which leases transponder capacity on Loral’s four in-orbit satellites. Goldin said that since Loral’s estimate, which was made in August 2004, fixed satellite service companies such as Skynet have staged a recovery in the market as judged by transactions concluded since then.

The third area where the Goldin analysis differs from Loral management’s valuations relates to the Xtar LLC company, which is 56 percent Loral owned. The company’s principal asset, the Xtar-Eur satellite, was successfully launched — without launch insurance — Feb. 12 on an untested Ariane 5 rocket.

The success of that launch removes a liability from Xtar and increases the company’s value to Loral to between $154 million and $178 million, according to the Goldin report. Loral had valued Xtar at between $104 million and $124 million.

In a separate SEC filing March 16, Loral said it disagreed with the Goldin Associates report.

Goldin’s analysis does not challenge Loral’s estimates for the value of the company’s 12 unused orbital slots — six over North America, five over Europe and Africa and one over Asia. Loral gives these slots a value of between $1 million and $1.25 million each. The Goldin analysis suggests that this too may be an unfairly low estimate, but the examination was unable to provide an independent assessment.