Why EchoStar Plunged Today

Shares of EchoStar (NASDAQ: SATS) plunged 12.1% on Friday, after the company failed to make an interest payment on one of its senior notes secured by its wireless spectrum.

The company is justifying missing the payment due to lingering uncertainty resulting from its current fight with the Federal Communications Commission over EchoStar's use -- or lack thereof -- of this key spectrum license.

Investors never like to see a missed interest payment, as it brings up the specter of potential bankruptcy, but the situation isn't quite as dire as that -- yet.

A missed interest payment is bad news, though maybe not fatal

EchoStar is entrepreneur Charlie Ergen's company and houses the Dish TV, Sling TV, and Boost Mobile wireless services, along with the associated satellite services that serves those businesses, and some valuable wireless spectrum.

That spectrum has become controversial of late. Per a 2019 deal, EchoStar was supposed to use that spectrum to launch a 5G network that would be able to rival the other big three telecom carriers. However, due to EchoStar's declining business, that buildout has been slow-going.

On May 9, the FCC commissioner wrote a letter to the company, saying last year's extension for its spectrum licenses is under a new review in the new administration. Of note, Elon Musk's SpaceX would also like to use that spectrum, and has accused EchoStar of hoarding it without putting it to use in the agreed-upon time frame.

While that letter was sent on May 9, today, EchoStar reportedly missed a $326 million interest payment on its 10.75% senior spectrum secured notes due in 2029, which was due to be paid today. The thinking, perhaps, is that since those notes were secured by the spectrum, and the status of that spectrum is now in flux due to the FCC review, EchoStar might as well not pay the interest unless it has to. Of note, the notes give EchoStar a 30-day grace period before it is technically in default.

Image source: Getty Images.

Expect the uncertainty to continue

EchoStar has been desperately trying to transform itself, as its largest business is the declining pay-TV business. Going forward, the company is hoping to build up Boost Mobile both as a new 5G service as well as a satellite-enabled wireless service, utilizing EchoStar's existing satellites.

While the missed interest payment is sort of voluntary and not necessarily a sign of an impending company default, the lingering spectrum controversy with the FCC isn't a great development. This is a story to steer clear of in the near term, until the turnaround story gets more clarity.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.