Sirius XM Added to NASDAQ Q-50/Refi 800 Million in Restricting Debt

By Relmor Demitrius -

Sirius XM Radio (NASDAQ:SIRI) had a slew of news hit the newswires on Friday.  They were added to the NASDAQ Q-50 index and refinanced 800 million in restrictive debt.  First news reported was that Sirius XM was offering 550 million dollars in notes that would be used to repay their 2005 500 million dollar bond issue, at 9 5/8%.  This was welcome news to Sirius XM investors, as it took down a large bond maturity year of over 1.8 billion dollars in 2013 to 1.3 billion dollars.  This reinforces investors views that the company would no longer be caught like it did in 2009, with more debt due than could possible be paid off with cash on hand.  As reported last week by KOAT, we predicted that Sirius XM would be removing these exact bonds in a matter of maybe days.  This proved to be true.  Then the results of the offering came in later that day.

Instead of receiving 550 million dollars, due to strong demand for Sirius XM debt, they were able to raise 800 million dollars instead, a full 250 million dollars more than they originally asked for.  Due to the increased amount garnered from the offering, Sirius XM stated they would use the added money to remove a 2012 senior secured loan that had very restrictive bond covenants on them, and limited Sirius XM’s ability in their corporate structure or just general plans moving forward.  These two debts being removed seemed odd at first to be targeting.  I mean, the loan has under 3% interest on it, and other bond debt had higher rates, or was due sooner.  That is until you look closer.

We find out that the 2005 and the 2012 loan had similar debt restrictions on them hindering the company’s ability to be flexible in multiple areas going forward.  This is from their filings on the loan.

“The Senior Secured Term Loan contains customary affirmative covenants and event of default provisions. The negative covenants contained in the Senior Secured Term Loan are substantially similar to those contained in the indenture governing SIRIUS’ 9 5 / 8 % Senior Notes due 2013. ”

Interesting.  In the filing on the loan, it actually mentions specifically these bonds due in 2005.  Well let’s see what bond covenants are on the debt and see if we can’t ascertain Sirius XM’s intentions here.

“Covenants and Restrictions

The 9 5/8% Notes, Loral Credit Agreement, SIRIUS Term Loan, XM Term Loan, 13% Notes and XM Revolving Credit Facility require compliance with certain covenants that restrict our ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another person, (vi) sell, assign, lease or otherwise dispose of all or substantially all of our assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions as provided in the applicable indenture or credit agreement. SIRIUS operates XM Holdings as an unrestricted subsidiary for purposes of compliance with the covenants contained in its debt instruments. The XM Term Loan and the XM Revolving Credit Facility also require XM to maintain a level of cash and cash equivalents of at least $75,000. If we fail to comply with these covenants, the 9 5/8% Notes, SIRIUS Term Loan, XM Term Loan, 13% Notes, the Revolving Credit Facility and any loans outstanding under the Loral Credit Agreement, the SIRIUS Term Loan and the XM Term Loan could become immediately payable and the Loral Credit Agreement could be terminated…”

Wow.  Those are some heavy conditions and affects almost every aspect of their business.  A company coming out of debt and cash problems and growing doesn’t want to deal with such terrible and restrictive conditions such as the ones above.  From calling the Loral Credit Agreement due immediately to being restricted from merging the subsidiaries of Sirius and XM, now Sirius XM, into one corporate structure as well.  As these 2 debts do affect their abilities to merge their corporate structure, this could be one of the main reasons for the move.  Possibly expect a new stock ticker soon, with a new company name at one point to emerge out of this.  This of course would cause shorts to scramble and close, and all naked shorts will be left high and dry.  This would be a great move by CEO Mel Karmazin.  In the least it enables Sirius XM to have the least amount of bond control in their board room.  This move further helps remove debtors from the inner workings of the company.  On another bullish note from the debt offerings, Liberty Media purchased 150 million of these notes, increasing their amount of Sirius XM debt they own.  Liberty now owns around 10 % of all Sirius XM debt.  This puts even more control in the friendly hands of their future global business partner, Liberty Media, which owns 40% of Sirius XM Radio through Liberty Capital (NASDAQ:LCAPA).

These notes are have a 8.75% rate on them, and are due in 2015.  This pushes 500 million dollars due in 2013 out to 2015.  It also removes the only debt due to maturity in all of 2012.  With cash on hand being used to remove all debt due in 2011, this removes all debt concerns until the year 2013.  And now 2013 is manageable.  These are great moves adding to the short term liquidity of Sirius XM, improves their debt structure, and enables them to be extremely more flexible by removing restricting debt covenants.

S&P did comment on the debt offering, and offered a very respectable B- rating on the offering.  This is their highest bond rating they have received since they began refinancing their debt in 2009.  S&P also maintained their positive outlook on Sirius XM in regards to their corporate credit rating, indicating another upgrade could be in the works again shortly.  Sirius XM recently had their credit rating upgraded and it may go up again, as S&P has a history, just last year, of raising their rating twice in a short period of time, and after an announced bond sale.

Moody’s also weighed in on the debt, and attached a Caa2 rating on them.  They had this to say about the offering.  Comments seemed generally positive.

“Moody’s believes the offering improves the intermediate-term liquidity profile by reducing the sizable amount of 2013 debt maturities to approximately $1.3 billion with minimal effect on overall cash interest expense. Debt-to-EBITDA increases moderately to 9.0x from 8.8x (incorporating Moody’s standard adjustments) and remains very high given the long-term reinvestment needs, but the improvements in the liquidity position over the last 12 months provide management additional flexibility to execute its growth plan and potentially reduce leverage to a more sustainable level. Sirius XM’s Caa1 Corporate Family Rating (CFR), B3 Probability of Default Rating (PDR) and the individual debt instrument ratings in the consolidated entity are not affected and the rating outlook remains stable.”

Basically the cost savings on any lowered interest rate is not quite made up due to the extending out of the debt 2 years, and the added costs of adding the notes.  But the short term positioning is strengthened, and their debt structure is much more removable today than yesterday.

Lost in all this bond news on Friday was another piece of great news for the company.  It was reported late Friday that Sirius XM would be added to the NASDAQ Q-50 index, which tracks the next best 50 companies that might be added to the elite NASDAQ-100, which is the equivalent to the DOW JONES on the New York Stock Exchange.  Interesting news coming from a company who is supposedly being threatened with a delisting letter tomorrow for the minimum bid price rule of over $1.  This is obviously not an issue, and as stated by Mel Karmazin in the February conference call on their Q4 earnings release, that they will file for the exception and would be successful in acquiring it.  This seems to further prove the point that this company is no danger of being delisted, or being denied an extension in time to trade over $1.  It seems a foregone conclusion now.  The perceptions of this stock are changing, and with an improving debt structure, positive comments from both the major rating agencies, and now full year free cash flow, I’m not surprised.  Throw in guidance growth, and one can see why they were added to the NASDAQ Q-50 index.