Leap defaults on vendor loans

Leap Wireless International said it has defaulted on its vendor credit facility loans and issued 21 million shares of common stock. As a result, it likely will be delisted by Nasdaq.

An arbitration court ruling forced Leap to pay 21 million shares to MCG PCS, priced at $1.894 per share -- or about $41 million -- as an adjustment price for two New York PCS licenses Leap purchased from the company. Because Leap didn’t have time to obtain shareholder approval, it faces the Nasdaq delisting.

Leap previously announced it had retained UBS Warburg to find new sources of financing and restructuring of debt, but some of its lenders under Leap’s credit facilities have stopped funding new loan requests, including loan proceeds for interest that had previously been paid under these facilities, Leap said in a press release. Leap has decided not to pay the interest on these loans.

“Leap’s issuance of the shares to MCG and failure to pay interest constitute events of default under the credit facilities,” said Leap. “These events of defaults provide the credit facility lenders with certain rights under their credit agreements, including the right to declare their existing loans to be due and payable.” Leap declined to comment further.

Ericsson, one of Leap’s principal vendors, said its exposure stands at about $118 million. In addition, Ericsson has $365 million in un-drawn commitments to Leap.

“While Leap has stated its intention to continue its operations in an uninterrupted fashion, the outcome of the process publicly announced and communicated to Ericsson is uncertain,” Ericsson said in a statement.

Leap’s other vendors, Lucent Technologies and Nortel Networks, would not say how much they are exposed to Leap. “We value them as a customer and have been working with them on their business plans as they are refined,” said a Nortel spokeswoman. “We do not have a material exposure.”

Analysts believe Leap’s chances of restructuring its debt are slim.

“If they can get the debt levels down and some operating momentum continues, there is some chance they can stay as an operating company,” said Ned Zachar, partner with Thomas Weisel Partners, who recently stopped covering the stock.