Vector Launch and the Basics of Bankruptcy

Any class in linear algebra or introductory physics will provide some basic characterizations of vectors: Euclidean, collinear, orthogonal, you name it, the list goes on and on. Unfortunately last month, a new type of vector arose: bankrupt. Tuscon-based rocket startup Vector Launch finally filed for Chapter 11 bankruptcy after months of rumored financial turmoil and large-scale layoffs. It's always a melancholy moment watching space companies go bankrupt; as someone who dreams of a robust space economy, I feel like a mother bird wanting to see each of his children fly off from the nest and make gazillions in space. But sadly that's not how it works. Like the Internet startups of 20 years ago, for every one that takes off, a dozen go kablooie

Illustration of a Vector-R deploying its payload in orbit. How sad we'll never get to see this happen

Vector was founded in 2016 and was developing the Vector-R and Vector-H boosters, small expendable boosters that were intended to lift CubeSats and other miniature payloads into orbit. Like the other space startups racing to claim market share in the smallsat launch industry (most notably Rocket Lab, Firefly Aerospace, and Relativity Space), Vector had ambitious development timelines and even a few contracts under its belt. But spaceflight is hard and schedules slip; despite announcing plans to use launch site LC-46 at Cape Canaveral and the Pacific Spaceport Complex in Alaska for initial launches of its Vector-R in 2018, and even winning a USAF contract last summer, none of its rockets ever reached space
Good comparison of rocket sizes - Vector-R would've listed about 60kg to LEO; SpaceX's Falcon 9 can lift about 22,000kg

Problems arose last August when Vector announced CEO Jim Cantrell was departing and the company was pausing all operations after one of its biggest venture capital backers, Sequoia Capital, withdrew funding. This caused a domino effect as other investors pulled out and left the company cash-strapped (oh, those finicky VC funds!), and now Vector has finally decided to seek bankruptcy protection. So here comes my best attempt at using Vector as a case study to teach bankruptcy proceedings - keep in mind that when I was still an investment banker, I did healthcare mergers & acquisitions, not restructuring. But I think I know my stuff, so here goes nothing!

Although Vector never reached orbit, they had a number of successful engine hot fires and even two suborbital test flights

Companies are funded by some combination of equity and debt, and they file for bankruptcy when they're unable to meet the mandatory interest and principal payments specified in their debt issuances. Since debt holders always get paid out before equity holders, if you own stock in a bankrupt company, your investment is basically wiped out. But just because a company is bankrupt doesn't mean it's already ceased to exist, as there are two types of bankruptcy proceedings: Chapter 7 and Chapter 11 (learn more here). Chapter 11 is usually the first step, where a distressed company (the debtor) petitions the state bankruptcy court to allow negotiations with its creditors to restructure its crushing debt load into something more manageable. Usually this requires some pretty painful compromises from both sides. For example, the creditors may grant the company more time to pay back their debt, but only if the company sells off key assets and complies with other operational changes. The hope is the distressed company can emerge from bankruptcy on more stable financial ground so that everyone recoups more than if the company simply evaporated. And importantly, gaining bankruptcy protection prevents the creditors from taking further legal action against the company

Now that's a pint-sized rocket if I ever saw one!

It's at this crossroads that Vector Launch finds itself - now that they've got the court's bankruptcy protection, they need to lay out a plan to emerge from bankruptcy. To this effect, Vector struck a deal with Lockheed Martin in which LMT provided "debtor-in-possession" (DIP) financing to Vector consisting of a \$500,000 loan and a proposal to buy assets related to its GalacticSky satellite program for no more than $2.5mm. So what the heck is DIP financing? Once a company has declared Chapter 11 bankruptcy, it can obtain special court-approved financing that supersedes all existing debts, providing a vital lifeline to keep the company operating while it reorganizes. It also helps signal to the company's suppliers and customer that the business can continue (at least in the near term), helping avoid additional disruption. This type of financing is common for bankrupt companies; during the Financial Crisis of 2008, General Motors and Chrysler received huge DIP financing packages to stay afloat

The diagram makes it look nice and easy - not always so in the real world! | Credit: Paragon Financial

If all these attempts fail, the bankrupt company will likely shift to Chapter 7 proceedings, initiating a liquidation where its assets are all sold off to raise cash that pays off as much of the debt outstanding as possible. Should Vector Launch reach this point, then when the dust settles, there won't be a Vector Launch anymore. My fingers are crossed - let's hope they can sort themselves out!

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