One of the hallmarks of the technology boom has been its ability to create massive amounts of stock-market wealth in a very short period. Now the collapse of Iridium LLC is demonstrating that carloads of capital can be destroyed just as quickly.
Iridium raised roughly $500 million in two stock offerings over the past two years. Virtually all of that money is likely to be lost because of the company's decision on Friday to seek reorganization in bankruptcy.
Stock of the talk-anywhere telephone company, which traded for almost $69 a share only 15 months ago, was a little over $3 a share on Friday when trading was halted by the bankruptcy filing. "The stock should be closer to zero," suggested Vijay Jayant, an analyst at Bear Stearns & Co. in New York.
Holders of Iridium's $1.5 billion in junk bonds also face big losses, but they are expected to end up owning a large part of whatever is left when--or if--Iridium emerges from bankruptcy. Yesterday, Iridium disclosed that the bondholders have rejected an offer of one-third of the company in lieu of the interest and principal they are owed on the bonds.
Iridium's bonds have been trading around 15 cents on the dollar, which provides a clue as to what speculators think they might ultimately be worth.
The big losers on the bonds could include small investors who own shares in mutual funds that hold Iridium's paper, reports Capital Access International, a New Jersey firm that tracks bond investments. Because mutual funds buy bonds of many companies, the net result of the Iridium bond losses will be to reduce the funds' total yield.
Capital Access said Fidelity, Franklin, Putnam and IDS funds were among the biggest Iridium bond investors, based on financial reports filed earlier this summer. Many of the mutual funds and insurance companies that were big Iridium bondholders bailed out well before the bankruptcy, but have not yet filed reports showing the disposition of their holdings, the investment tracking firm reported yesterday.
Who will take the hit on Iridium stock is even harder to determine. When the company went public in 1997 and when it sold a secondary stock issue last January, most of the shares were purchased by institutional investors. Those investors also began selling earlier this year when troubles with Iridium's worldwide satellite phone system first became apparent.
When the big institutions unloaded their Iridium stocks and bonds, speculators stepped in and bought them. The bonds were purchased primarily by "vulture" funds that make money by picking up bonds of distressed companies at low prices and then nursing them through the bankruptcy process in hope the bonds will be worth more in the future.
Iridium stockholders have less prospect of recouping their money because the bondholders are ahead of them in line at the bankruptcy court. The prospect that shareholders could come out of the bankruptcy with anything are considered so remote that when some speculators began touting Iridium stock a few weeks ago they were labeled "Iridiots."
CAPTION: Halting Iridium (This chart was not available)