NextWave heads toward bankruptcy despite a spectrum goldmine

On Monday NextWave, a wireless spectrum holding company, said it could not renegotiate the terms of its debt with lenders, which means its next stop may be the bankruptcy courts. But amid a coming spectrum shortage, NextWave has hundreds of megahertz that could be used for mobile broadband that it has tried to sell since November 2009. NextWave’s woes help explain why the U.S. spectrum policy is so difficult.

According to a document filed with the SEC on Monday, NextWave is considering bankruptcy:

As previously disclosed, NextWave’s cash reserves are not sufficient to meet these payment obligations. If the limited waiver expires in the absence of a comprehensive forbearance agreement, a refinancing transaction or a maturity extension, an event of default will arise under the First Lien Notes, Second Lien Notes and Third Lien Notes. Based on such default, and subject to the terms of an inter-creditor agreement among the various classes of notes, the holders of the secured notes could proceed against the assets pledged to collateralize these obligations, including all of NextWave’s domestic wireless spectrum assets. These conditions raise substantial doubt about NextWave’s ability to continue as a going concern. Inability to obtain a forbearance agreement, and ultimately a refinancing transaction or maturity extension, would significantly restrict the Company’s ability to operate and could cause it to seek relief through a filing in the United States Bankruptcy Court.

The company owns huge chunks of spectrum in the 2.3 GHz and 2.5 GHz bands that could be used for mobile broadband, and it covers some important metro areas such as San Francisco, Los Angeles, Chicago, New York City and Boston, as well as dozens of other cities. So why can’t it sell, given the looming spectrum shortage and the all-out effort from the FCC and Congress to get some of the spectrum currently used by the local broadcasters?

The politics of spectrum are messy and tangled up by regulations, geographic areas and the economics of building out networks. For example, the FCC and other government agencies have to negotiate to free up certain spectrum bands for use in mobile broadband — a process hindered by companies trying to protect a barrier to entry and by technical considerations that can cause existing wireless services to experience problems. LightSquared’s efforts to deploy mobile broadband and its fight with the GPS industry are a perfect example of this. The WCS spectrum NextWave owns had limits placed on it that the FCC removed as part of the National Broadband Plan.

As for geography, rural areas generally have room in their airwaves because people aren’t hunkered down using them, but cities typically do not. Much like traffic on the highways, the airwaves over cities are just as congested. But since NextWave has spectrum in cities, why isn’t that sold? Geography also plays into the next element of spectrum valuations — the physics of transmitting data and building a network over certain bands.

Here’s where things get messier and all the forecasts for NextWave’s valuation from three years ago fall short. The physics of spectrum mean that lower frequencies, such as the 700 MHz block sold off in 2008 for LTE deployments, go through walls better and travel farther. This means an operator has to put up fewer towers and the resulting mobile broadband product offers better performance indoors, where people use it.

And fundamentally, when you are trying to build out a network that costs billions, cutting the number of tower deployments by half or even a third because of higher-quality spectrum makes a difference. So it’s less of an overall spectrum shortage and more that there’s a shortage of the “beachfront property” spectrum, such as what broadcasters currently hold. Which is why it’s called beachfront property and why NextWave is having a hard time. Maybe if NextWave and its spectrum assets hit the bankruptcy courts, we’ll see someone pick up those airwaves with the intent to deploy mobile broadband, or maybe we’ll see another speculator.