DirecTV/Dish merger has a problem as debt holders object to $1.6 billion loss

DirecTV’s agreement to buy the Dish satellite and streaming TV business from EchoStar is facing opposition from Dish creditors who would be forced to take a loss on the value of their debt.

Dish creditors “plan to block a distressed exchange that’s a key part of its tie-up with rival DirecTV, according to people familiar with the matter,” Bloomberg reported today. “A group of steering committee investors has gained a blocking position in order to negotiate with the company, the people said. They may even explore a better outcome through litigation, said some of the people.” The Bloomberg article was titled, “Dish-DirecTV Deal Sparks Creditor Revolt Over $1.6 Billion Loss.”

As Bloomberg notes, “Dish needs consent from its bondholders to exchange old debts for notes issued out of the new combined entity” in order to complete the deal. A previous Bloomberg article said that “just over two-thirds of [Dish] bondholders in each series of notes have to agree to the exchange, with the deadline set for October 29.” EchoStar executives argue that debt holders will benefit from the merger by “owning debt of a stronger company with lower leverage,” the article said.

Credit-rating firm S&P Global said in a research note that it views “these transactions as tantamount to a default because investors will receive less value than the promise of the original securities,” according to Variety. On the other hand, S&P Global “added that in exchange the new notes will carry a higher rate of 8.875 percent and be secured by assets of the combined businesses of DirecTV and Dish,” Variety wrote.

Debt exchange

DirecTV agreed to buy the Dish satellite TV and Sling TV business for a nominal fee of $1 in exchange for taking on $9.75 billion of Dish debt. But DirecTV’s deal announcement on Monday said the merger needs approval from Dish debt holders, who would see their investments devalued.

Dish notes would be exchanged with “a reduced principal amount of DirecTV debt which will have terms and collateral that mirror DirecTV’s existing secured debt,” DirecTV said. DirecTV’s announcement goes on to say that the principal amount will be reduced by at least $1.568 billion and that the deal can be scrapped if debt holders object: