SIRIUS XM 2009 Debt Is A Non Issue
Seems like a lot of people are becoming more sophisticated these days as they try to learn all they can about convertible arbitrage. I was reading over Sirius’ 10Q filed today. After hearing Mel on Cramer referring to converts coming due in 2009, I decided to look into it a bit deeper. I have seen message board posters claiming billions had to be repaid in 2009.
I did find 2 converts coming due in 2009. The first one is a total of $300,000.00 due in February 2009. On the grand scale this would seem like minutia. Also listed was $1.7 million in “aggregate principal amount of 8-3/4% Convertible Subordinated Notes due 2009”. These are not due until September. That’s a total of 2 million dollars. Not for nothing, but refinancing those notes should not be a problem. In fact they should just be paid off.
Not finding anything of real importance in Sirius’ filings, I headed over to the former XMSR filings. This is where the debt issue comes into play. XM has $400.0 million of 1.75% Convertible Senior Notes maturing. These were announced at the end on December of 2002. I have been unable to ascertain whether they are due in January of 2009 or December of 2009. For arguments sake, let us assume that they are due this January.
Also of interest is 187.5 million due on a revolving credit facility in 2009, again I was unable to find in the mountains of press releases any firm due date. This is probably the bank issue Mel made reference to in his interview. So now we’ve gone from billions due, to just under 590 million that does not have to be paid off, but refinanced.
Credit markets exist for a reason. They add liquidity and of themselves there is nothing wrong with using them….especially when the terms are beneficial to companies. SIRIUS XM now has an annual projected revenue stream of 2.4 billion dollars. When these deals were originally inked there was no guarantee that Satellite Radio would even be a viable business.
The reason I am bringing this up is because a lot of boiler room message board groupies are using the word “converts” as a scare tactic. These convertibles were issued many years ago, and shorted against back in 2002 -2003. The shares were already shorted, and as Jim Cramer pointed out today, is customary practice.
SIRIUS XM should not have a problem refinancing any of this debt. So what does it mean to shareholders? It should mean nothing! That’s right, absolutely NOTHING! As the old converts are paid off, the existing short positions are covered, and the shares returned. The replacing converts (assuming this is the debt instrument chosen at that time) short against the new. The net effect is a zero-sum-game. The new shares used a few weeks ago for arbitrage purposes was for new debt. Refinancing these old convertibles, as Martha Stewart would say, is a good thing, and shouldn’t result in any dilution of shares. In the end, it will not matter if 600 million needs refinancing or 6 billion.
Position: Long SIRI
Now that you just made us unsophisticated investors sophisticated, it is clear that the manipulators took advantage of us unsophisticated Sirius investors. Now that we are now more sophisticated, does the share price stop plunging?
I’m sorry. My computer must be broken. All of my accounts show that it went higher today..
sirius rules it makes me buy hotspots,
radios..boomboxes…new cars,old cars and nomatter the situation ill always keep paying for sirius…….best radio peeriod
BM,
Keyword “today”. Hope the down trend has ended. Good article.
Brandon, the re-financed converts will have a lower conversion price that will allow more shares to be shorted against them for the same $ value.
My understanding is that Sirius has 300 million due Feb 2009 and XM has 400 million due Dec 2009 that was previously refinanced for 13% interest rate.
I still don’t quite understand the convert shorting.
OK Brandon I followed you through until the end. How are converts with an arbitrage play that shorts the stock at a lower cost per share a “zero sum game” as SiriusXMInvestor pointed out? Don’t the shorted shares still put downward pressure on the stock price until returned? Also why does it not matter if you refinance 600 million vs 6 billion. The carrying cost difference is huge.
cos what are you talking about? 6 billion…
Brandons last line in his article says: it will not matter if 600 million needs refinancing or 6 billion.
I’m sorry Brandon but “Debt is a Non Issue” is terribly misleading. Any debt that the company has decreases Shareholder Equity and I know you know this. Refinancing older debt at higher interest rates impacts both FCF and Shareholder Equity. Converts, even thought they are not technically, according to GAAP standards, dilutive to the common shares, still put downward pressure on the price of the stock because of the short position taken by the purchasers of the notes for as long as they exist. Just because there are credit facilities out there and debt can be refinanced, doesn’t make it a Non Issue. It keeps them from bankruptcy but hardly paints a great picture moving forward and understates the impact of “Debt”.
cos, I think Brandon’s point was this:
If you roll the converts into a new convert, you will have the initial converts covering their short position at the same time that the new converts are shorting. Though there will be a slight difference in the issue price, it is basically a zero sum game.
What this does not take into effect is if Sirius XM actually pays back some of the debt due. In that case, it would exert a slightly positive pressure on the stock.
>>>I have been unable to ascertain whether they are due in January of 2009 or December of 2009. For arguments sake, let us assume that they are due this January.
FWIW, the XM 1.75% Notes mature on December 1, 2009.
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Found a nice site through Edgar that has it broken down, but does not have due dates.
Sirius:
2.5% convertible due 2009: $300 million
3.5% convertible due 2008: $2.25 million
8.75% convertible subordinated note due 2009: $1.75 million.
XM:
1.75% Convertible Senior note due 2009: $400 million
10% Senior secured discount convert due 2009: $30 million
That brings the total debt due 2008/2009 to $734 million in convertibles and senior notes.
It also shows Sirius has a Senior Secured Term Credit agreement (no due date mentioned) of $250 million, and XM has a Senior Secured revolving credit facility for $187.5 million with no due date mentioned. Not sure where those fall.
>>>Also of interest is 187.5 million due on a revolving credit facility in 2009, again I was unable to find in the mountains of press releases any firm due date. This is probably the bank issue Mel made reference to in his interview. So now we’ve gone from billions due, to just under 590 million that does not have to be paid off, but refinanced.
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Again, FWIW, the XM Bank credit facility is actually $350 million now, and it matures in May of 2009.
This amount is made up of the original $250 million facillity, which XM borrowed the remainder on earlier this year to use for the MLB escrow deposit… plus an additional $100 million term loan offered by one of the banks, under the same terms of the credit facility. It all “expires” in May of 2009.
I say “expires” instead of “matures” because these are not Bonds — this is Credit. These don’t mature, but rather the agreement between XM and the banks “expires”. So what does this mean? In most cases I’ve seen when companies are not ready to refinance or pay of the credit — they negotiate to extend the length of the agreement. That is done quite often. So if they decide not to refinance this amount — they can extend the term of the facility, with a possible change in the interest rate (up or down, depending on the companies standing and the markets condition).
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What is due and when from Sirius (roughly $302 million):
$300 million, 2.5% Convertible Note, with conversion price of $4.41 per share… these mature on February 15, 2009. These will have to be refinanced.
$1.75 million, 8.75% Convertible Subordinated Note, with a conversion price of $28.4625 per share… these mature on September 29, 2009. This will likely just be paid off with current cashflow.
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What is due and when from XM (roughly $783 million):
$400 million, 10% Convertible Senior Notes (formerly 1.75% Notes), with a conversion price of $50.00 per share of XMSR (equivolent to $10.87 in SIRI)… these mature on December 1, 2009. These will have to be refinanced.
$33.2 million, 10% Senior Secured Discount Convertible Notes (all held by American Honda Motor Co., Inc), with a conversion price of $3.18 per share of XMSR (equivolent to $0.6913 in SIRI)… these mature on December 21, 2009. Honda will likely just convert these and dispose… most of this was hedged by them a long time ago.
$250 million, Senior Secured Revolving Credit Facility. This expires on May 5, 2009. Interest on this is currently, approximately 4.75%. The expiration of this, IMHO, may be extended.
$100 million, Senior Secured Term Loan. This expires on May 5, 2009. The terms of this are nearly the same as the credit facility, and offered by one of the banks involved in the facility. Interest on this was last reported at, approximately 5.5625%. The expiration of this, again IMHO, may be extended.
$0, GM Senior Secured Credit Facility. This expires on December 31, 2009. Interest on this at around 11%… thus there is no balance due on this facility currently. The expiration of this, again, IMHO, will be extended.
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Looking at a calendar:
February 15, 2009 – $300 million (Sirius)
May 5, 2009 – $250 million (XM)
May 5, 2009 – $100 million (XM)
September 29, 2009 – $1.75 million (Sirius)
December 1, 2009 – $400 million (XM)
December 21, 2009 – $33.2 million (XM)
December 31, 2009 – $0.0 (GM facility) (XM)
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Total due in 2009… $1.085 billion
IMHO, $350 milion of this may have their terms extended; $33.2 million will be converted into shares; $1.75 million will be paid in cash; leaving the remaining $700 million that will need to be refinanced for the two issues remaining (Sirius’ $300 million, due February 15, 2009 and XM’s $400 million, due December 1,2009).
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Newman, the $2.25 million in 3.5% convertible notes due 2008 were paid off on June 1, 2008.
homer985, Thank you so very much for making the debt perfectly clear. You ARE the Man!!
Newman, my point is that depending on the price point set on the shares lent for the converts so that they can be hedged, and the interest rate on the new notes, “Zero Sum Game”, is not known. With a lower stock price at the time of refinancing, more shares will be needed, creating a more dilution potential, perceived if not realized. A higher interest rate for the new notes speak for themselves. These are still variables “not known” at this time, making Debt still an Issue.
from sirius’s just filed 10Q
21/2% Convertible Notes due 2009
In February 2004, we issued $250,000 in aggregate principal amount of our 21/2% Convertible Notes due 2009 resulting in net proceeds of $244,625. In March 2004, we issued an additional $50,000 in aggregate principal amount of our 21/2% Convertible Notes due 2009 pursuant to an option granted in connection with the initial offering of the notes, resulting in net proceeds of $48,975. These notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 226.7574 shares of common stock for each $1,000.00 principal amount, or $4.41 per share of common stock, subject to certain adjustments. Our 21/2% Convertible Notes due 2009 mature on February 15, 2009 and interest is payable semi-annually on February 15 and August 15 of each year. The obligations under our 21/2% Convertible Notes due 2009 are not secured by any of our assets.