CUSTOMER:

High-end, Traveling, Professional, Telecom Market

SERVICE PROVIDER:

Iridium, LLC, a consortium consisting of numerous telecom companies, as well as Motorola, Lockheed Martin and Raytheon.

TRANSACTION STRUCTURE:

Commercial Venture

YEAR:

1998                                           DURATION: Indefinite

ILLUSTRATION: This case study illustrates the dynamic nature of the nonrecourse project finance market As unique transactions are brought to the market for funding, they test the limits of the market, often requiring adjustments to risk allocations and financial structures. The financing of Iridium illustrates this process as the market tried to balance the significant prospects associated with wireless communications against the technical risks of establishing a sixty-six satellite communications network in space. This case study also illustrates the current trend of bolstering the credit structure of risky transactions with limited recourse to developers balance sheets for portions of debt.

BACKGROUND: The Iridium system is a satellite-based, wireless, personal communications network designed to allow any type of telephone transmission to reach its destination anywhere on Earth at any time. Originally conceived by Motorola engineers this system will consist of a constellation of sixty-six satellites located 420 nautical miles above the Earth's surface. The low earth orbit of Iridium's satellites will allow more tightly focused beams to be projected on the ground, providing transmissions that are clear and strong.

TERMS OF CONTRACT/RISK ALLOCATION. As a commercial venture. the significant market, technology, construction, and launch risks, as well as the regulatory risks associated with securing transmission rights for more than 180 countries, are assumed by the consortium. Therefore, the primary sponsors of the consortium pursued non- recourse debt structures which insulated their exposure in the project.

ISSUES CONFRONTED: Iridium and its primary competitor Globalstar, pushed the boundaries of the debt market tolerance for risks in multiple financings during the 1994-97 period. Iridium had hoped to fund the 55 billion project cost through a combination of contributions from the thirteen sponsor organizations, a public stock offering, and a mixture of commercial loans and project bonds. In its original foray into the debt markets, Iridium sought to raise $300 million in the bond market and found the market was uncomfortable with the risk profile at mat time. In response, Iridium raised an additional $315 million from its equity investors and secured a line of credit of $750 million from a group of 62 banks. This line was guaranteed by Motorola and therefore provided recourse to die main sponsors' balance sheet.

OUTCOME/CURRENT STATUS: Given the increased equity commitment and the balance sheet risks assumed by Motorola, Iridium was able to raise an additional $800 million in bonds the following year. Given the market's appetite for Iridium's debt, the consortium has been able to launch satellites and a system is scheduled to be online by September 1998.