Falcone's LightSquared Roams Into Bankruptcy

NEW YORK ( TheStreet) -- Philip Falcone-run hedge fund Harbinger Capital Management has put its multi-billion dollar 4G wireless investment LightSquared into bankruptcy.

After crippling regulatory setbacks and multiple extensions with its lenders, LightSquared, a high-speed wireless service that was planned to provide connectivity to 260 million users, was unable to continue negotiating a recovery strategy and has filed for Chapter 11 bankruptcy, a move that will likely wipe out most of Harbinger's near-$3 billion investment.

LightSquared listed more than $1 billion in assets and debt in its bankruptcy filing. Earlier on Monday, The Wall Street Journal and Reuters reported that a bankruptcy filing was imminent after negotiations with lenders broke off. While Carl Icahn was the most vocal lender calling for a bankruptcy, reports indicate that the activist investor has dumped his LightSquared stake and won't be a part of the bankruptcy process.

For Falcone, a former professional hockey player, LightSquared's bankruptcy is another giant blow to his fund Harbinger Capital Management, which at its peak had roughly $26 billion in assets under management after a successful bet against mortgage bonds prior to the housing bust. The fund's assets have dwindled to just a few billion, the New York Times reports.

Meanwhile, in bankruptcy LightSquared will likely receive greater input from its lenders like hedge fund manager David Tepper, Fortress Investment Group ( FIG), Knighthead Capital Management, Redwood Capital Management and investment firm Capital Research. In the company's bankruptcy filing, LightSquared said that Boeing Satellite Systems and Alcatel-Lucent ( ALU) are its largest claimants.

Reuters reported earlier in May that Carl Icahn, once a large owner of LightSquared debt, sold a $250 million position in the venture's debt at a moderate profit. Meanwhile, the New York Post reported that Charlie Ergen of Dish Network ( DISH) acquired $350 million of the company's debt.

In April, Falcone said that he would consider a bankruptcy, however his focus was on swapping the venture's assets for spectrum controlled by the U.S. Department of Defense. Falcone also told Reuters that a bankruptcy would give LightSquared the chance to fix interference issues with global positioning devices as it tried to revive a build out of a nationwide wireless broadband network on airwaves once used by satellite systems.

After years of financial difficulties that included an expensive loan owned by prominent hedge fund investors, problems for LightSquared escalated in February when the Federal Communications Commission said that the network would interfere with the GPS used by airlines, the military and others. Soon thereafter, LightSquared faced an exodus of wireless partners like Sprint ( S) and Leap Wireless ( LEAP) and calls by its creditors to enter bankruptcy, wiping out most of Harbinger's $2.9 billion investment. Earlier in the year, the company's CEO Sanjiv Ahuja resigned and it cut 45% of its staff to preserve cash, as it worked on a survival strategy.

In April, reports indicated that Falcone was still resisting calls from large creditors like Carl Icahn to enter bankruptcy. LightSquared had until the end of April before creditors call a breach of covenants on a $1.6 billion loan that would have put it in default; however those agreements were extended until 5 p.m. today and couldn't be renegotiated once more.

In his April Reuters interview, Falcone said that as LightSquared considered a bankruptcy, he believed his hedge fund's investment might not be wiped out on the remaining value of the company's spectrum assets. Those assets will now be part of the company's bankruptcy plan.

In its now iced partnership with Sprint, LightSquared was to pay $9 billion and give an additional $4.5 billion in credits to Sprint to build out the network, which was expected to compete with the nationwide coverage offered by AT&T ( T) and Verizon ( VZ). After walking away from LightSquared in mid-March, Sprint agreed to return $65 million in prepayments to LightSquared that the nation's third leading wireless carrier made under a 11 year-wireless service agreement that started in June 2011.

In March, Wells Fargo analyst Jennifer Fritzsche wrote in a note that the partnership break between Sprint and LightSquared will benefit Clearwire ( CLWR) as the carrier bolsters its smartphone services to better compete against Verizon ( VZ) and AT&T ( T).

For more on Sprint and wireless carrier shares, see why the iPhone is causing telecom hangups and who's on a slow walk to bankruptcy.

-- Written by Antoine Gara in New York

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